Gold (XAU/USD) continues losing ground for the third straight day on Tuesday and drops to a fresh three-week low during the early European session. Signs of easing trade tensions between the US and China remain supportive of the upbeat market mood, which, in turn, is seen as a key factor undermining demand for the safe-haven precious metal. The downfall could further be attributed to technical selling below the $4,000 psychological mark.
Meanwhile, the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times this year keeps the US Dollar (USD) depressed for the second straight day. This, along with geopolitical tensions and economic risks stemming from a protracted US government shutdown, might hold back traders from placing aggressive bearish bets around the Gold ahead of a two-day FOMC policy meeting starting later today.
Daily Digest Market Movers: Gold selling remains unabated amid hopes for a US-China trade deal
- Expectations of further interest rate cuts by the US Federal Reserve keep the US Dollar depressed for the second straight day on Tuesday and assist the non-yielding Gold to stage a modest recovery from an over two-week low.
- According to the CME Group’s FedWatch Tool, traders have fully priced in that the US central bank will lower borrowing costs by 25-basis-points at the end of a two-day meeting on Wednesday and cut rates again in December.
- The bets were reaffirmed by the latest US inflation figures released on Friday, which showed that the headline Consumer Price Index and the core gauge (excluding food and energy) increased by the 3% YoY rate in September.
- US President Donald Trump, in response to Russian President Vladimir Putin’s announcement of a successful test of a new nuclear-powered cruise missile, warned that the US has a nuclear submarine off the coast of Russia.
- This keeps the risk of a further escalation of geopolitical tensions and turns out to be another factor lending some support to the safe-haven precious metal, though the US-China trade optimism could keep a lid on further gains.
- Top officials from the US and China agreed on Sunday a framework for a potential trade deal that will be discussed when Trump and Chinese President Xi Jinping meet this week, easing concerns about a full-blown trade war.
- This, in turn, remains supportive of the upbeat mood around the equity markets and might hold back traders from placing fresh bullish bets around the XAU/USD pair heading into this week’s key central bank event risks.
Gold could extend the fall to test sub-$3,900 levels below 38.2% Fibo. level
Acceptance below the $4,000 psychological mark, along with the fact that oscillators on the daily chart have just started gaining negative traction, backs the case for a further depreciating move for the Gold price. The XAU/USD bears, however, might wait for some follow-through selling below the $3,970 area and the $3,945 region, or the 38.2% Fibonacci retracement level of the July-October rally, before placing fresh bets. The commodity might then accelerate the downfall towards testing sub-$3,900 levels en route to the 50% retracement level, around the $3,810-$3,800 region and the 50-day Simple Moving Average (SMA), currently pegged near the $3,775 area.
On the flip side, move beyond the Asian session high, around the $4,019-4,020 region, could be seen as a selling opportunity and remain capped near the $4,050-4,055 zone. A sustained strength beyond might trigger a short-covering rally towards the $4109-4,110 region, which coincides with the 23.6% Fibo. retracement level support break point. Some follow-through buying would negate the near-term negative outlook and lift the Gold price to the $4,155-4,160 supply zone en route to the $4,200 mark and the next relevant hurdle near the $4,252-4,255 region.
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.
