Gold (XAU/USD) attracts some sellers following an Asian session uptick to the $4,046 area and, for now, seems to have stalled this week’s recovery from its lowest level since October 6. The US Dollar (USD) preserves its strong gains registered over the past two days, to a nearly three-month top, in the wake of the US Federal Reserve’s (Fed) hawkish tilt, which, in turn, is seen undermining the non-yielding yellow metal.
Apart from this, the latest optimism over a de-escalation of trade tensions between the US and China – the world’s two largest economies – turns out to be another factor denting demand for the safe-haven Gold. However, concerns about economic risks stemming from a prolonged US government shutdown might hold back the USD bulls from placing aggressive bets and act as a tailwind for the safe-haven precious metal.
Daily Digest Market Movers: Gold is pressured by Fed’s hawkish tilt and trade optimism
- The US Dollar holds steady near its highest level since early August, touched on Thursday amid the US Federal Reserve’s hawkish tilt, and exerts some pressure on the Gold price during the Asian session on Friday. In fact, Fed Chair Jerome Powell said that a further reduction in the policy rate at the December meeting is not a foregone conclusion.
- A high stakes meeting between US President Donald Trump and his Chinese counterpart Xi Jinping ended on a positive note. The US agreed to cut down tariffs against Chinese goods in exchange for China resuming US soybean purchases and keeping rare earths exports flowing. The optimism turns out to be another factor undermining the commodity.
- The US government shutdown has now entered its fifth week amid a deadlock in Congress on the Republican-backed funding bill, fueling economic concerns. This might hold back the USD bulls from placing aggressive bets, which, along with persistent geopolitical risk, could offer some support to the safe-haven precious metal and help limit further losses.
- Trump said on Thursday that he had ordered the US military to resume nuclear testing immediately. In response, Russia said that if the US resumes nuclear weapons testing it will do so too, sparking fears about a further escalation of the conflict. This, in turn, warrants some caution before positioning for any further depreciating move for the XAU/USD pair.
- In the absence of any relevant market moving economic releases due to the US government closure, traders will scrutinize comments from influential FOMC members for cues about the future rate-cut path. This will drive the USD demand and provide some impetus to the commodity, which remains on track to register gains for the third straight month.
Gold needs to find acceptance above 23.6% Fibo. level to back case for meaningful recovery
The XAU/USD pair did find acceptance above the 23.6% Fibonacci retracement level of the recent corrective decline from the all-time high, though it lacks follow-through and remains below the $4,050 key hurdle. The said area could act as a key pivotal point, above which a fresh bout of short-covering could lift the Gold price beyond the $4,075 region (38.2% Fibo. level), towards the $4,100 mark.
On the flip side, any further weakness could find some support near the $3,950 area ahead of the $3,917-3,916 region and the $3,900 round figure. Some follow-through selling below the $3,886 zone, or an over three-week low touched on Tuesday, could make the Gold price vulnerable to accelerate the fall towards the $3,850-3,845 zone en route to the $3,800 mark and the next relevant supports near the $3,765-3,760 zone.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
