Gold (XAU/USD) attracts some sellers following an intraday move higher to levels beyond the $4,200 mark and drops to a fresh daily low during the early part of the European session on Friday. A growing number of Federal Reserve (Fed) policymakers signaled caution on further easing amid the lack of economic data, prompting traders to trim their bets for another rate cut in December. This, in turn, is seen as a key factor acting as a headwind for the non-yielding yellow metal.
Investors, however, seem convinced that weakening economic momentum on the back of a prolonged US government shutdown could allow the Fed to ease monetary policy further. This, in turn, keeps the US Dollar (USD) depressed near a two-week low, touched on Thursday, and could support the Gold price. Apart from this, a generally weaker risk tone might contribute to limiting the downside for the safe-haven precious metal, warranting some caution for bearish traders.
Daily Digest Market Movers: Gold turns lower as traders trim bets for another Fed rate cut in December
- The reopening of the US government shifts market focus back to the deteriorating fiscal outlook. Moreover, market participants now seem convinced that the delayed US macro data will show some weakness in the economy and back the case for further policy easing by the US Federal Reserve.
- Economists estimate that the prolonged government closure might have already shaved approximately 1.5 to 2.0% off quarterly GDP growth. This comes amid signs of deteriorating labor market conditions and fails to assist the US Dollar to register any recovery from a two-week trough.
- Meanwhile, a senior White House official said that key economic reports for October – employment details and inflation data – may not be released at all. This prompted several Fed officials to signal caution on further easing, forcing investors to trim their bets for a rate cut in December.
- Minneapolis Fed President Neel Kashkari said the economic outlook is mixed as inflation continues to run higher. Separately, Boston Fed President Susan Collins said that given the limited information on inflation due to the government shutdown, she would be hesitant to ease policy further.
- According to the CME Group’s FedWatch Tool, traders are still pricing in a 50% possibility that the US central bank will lower borrowing costs by 25 basis points in December. Moreover, the probability of a rate reduction in January currently stands at over 75%, favoring the XAU/USD bulls.
- Traders might continue to scrutinize comments from influential FOMC members for more cues about the Fed’s rate-cut path. This, in turn, will drive the USD demand and provide some impetus to the non-yielding yellow metal, which seems poised to register strong weekly gains.
Gold needs to find acceptance above $4,200 mark to back the case for any further near-term appreciation
This week’s breakout through the $4,150 horizontal barrier and a subsequent move beyond the $4,200 mark was seen as key trigger for the XAU/USD bulls. Moreover, oscillators on daily/4-hour chart have been gaining positive traction, suggesting that the path of least resistance for the Gold price is to the upside. Any further move higher, however, might face some hurdle near the overnight swing high, around the $4,245 region, above which the commodity could aim to reclaim the $4,300 round figure.
On the flip side, the overnight swing low, around the $4,145 region, now seems to protect the immediate downside, below which the Gold price could accelerate the fall to the $4,100 mark en route to the $4,075 zone. Some follow-through selling could expose the $4,025 intermediate support before the commodity eventually drops to the $4,000 psychological mark. The latter is likely to act as a key pivotal point, which, if broken decisively, might shift the near-term bias in favor of bearish traders.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
