Gold firmly above $2,700 on global easing prospects

• Gold holds above the key $2,700 level, reaching fresh all-time highs, as interest rates globally are projected to decline more steeply. 
• Many major central banks are expected to enact interest rate cuts as inflation ducks, supporting non-yielding Gold. 
• XAU/USD continues trending higher and “the trend is your friend,” as technical traders like to say. 

Gold (XAU/USD) establishes a foothold above the $2,700 psychological level on Friday after piercing above this level on the previous day, setting yet another fresh all-time high. Traders are bullish bullion as they foresee a lower trajectory for interest rates globally. This, in turn, lowers the expected opportunity cost of holding Gold given it is a non-interest-paying asset, and makes it more attractive to portfolio holders.  

Gold breaks above $2,700 as central banks accelerate easing cycles

Gold makes higher highs as traders befriend the trend, and central banks appear to accelerate their monetary easing cycles by cutting interest rates. On Thursday, the European Central Bank (ECB) decided to lower its deposit rate by 25 basis points (bps), making it the second rate cut in a row. According to analysts, this marks a significant turning point and acceleration in the ECB’s easing cycle. Previously, the bank had only been expected to cut once per quarter. 

“Our European economists see yesterday’s meeting as signaling a pivot to an accelerated easing cycle and they continue to expect back-to-back 25 bps cuts until policy rates reach the midpoint of the 2.00 – 2.50% neutral range,” said Jim Reid, Head of Global Macro Research at Deutsche Bank, adding, “They see the risks tilted towards the ECB cutting faster and further than the baseline, with a 50 bps cut in December a real possibility.”

A fall in Japanese inflation data overnight has further brought into doubt whether the Bank of Japan (BoJ) will go ahead with its planned interest rate hikes. The Consumer Price Index (CPI) ex Fresh Food fell to 2.4% in September, which is below the BoJ’s 2.5% target for fiscal year 2024. 

The BoJ Governor Kazuo Ueda has said that if the incoming data meets the BoJ’s forecasts he will raise interest rates, so the inflation miss could be significant. Although inflation only dipped one tenth below the BoJ forecast – and was above the 2.3% estimated by economists – it was still a steep fall from the 2.8% of the previous month. If it remains consistently below 2.5%, the BoJ will likely keep the bank rate at its current super-low 0.25% level, making Gold even more attractive.

In the UK, the Bank of England (BoE) is now expected to cut interest rates at its meeting in November. Previously markets were doubtful about this possibility,  but the release of lower-than-expected inflation data in September has somewhat cemented expectations of a cut. 

Likewise, in Canada, there is speculation the Bank of Canada (BoC) could take a “bazooka” to its policy rate at its meeting later in October and blow 50 pbs (0.50%) off its 4.25% bank rate. 

This, and the fact that several Asian central banks have also made cuts recently, is supporting the rally in Gold.   

Upside capped by US data

Gold may face headwinds, however, after strong US data continues favoring a less aggressive approach from the US Federal Reserve (Fed), suggesting the US may be an outlier as interest rates there fall at a more measured pace.

US Retail Sales showed a higher-than-expected 0.4% rise in September, which was above the 0.3% forecast and the 0.1% increase seen a month earlier. 

Initial Jobless Claims data also indicated the US labor market remains resilient with 241K out-of-work Americans claiming benefits in the week ending October 11. This was below the 260K expected and 260K (revised up) in the previous week. Given the Federal Reserve’s concerns about the fragility of the US labor market, the data had a disproportionately positive impact on the future path of monetary policy.

Currently, markets are pricing in almost a 92% chance of a 25 bps cut in the fed funds rate in November and an 8% probability of no change at all, according to the CME FedWatch tool. This is down from 94% and 6%, respectively, 24 hours ago.

Technical Analysis: Gold plants flag above $2,700

Gold pierces through the $2,700 psychological level and rallies to a new all-time high. The establishment of a higher high reconfirms the uptrend and suggests the odds favor more upside to come.

XAU/USD 4-hour Chart

A break above $2,714 should confirm a continuation to the next – somewhat arbitrarily selected – target at $2,750 – significant because it is a round number and traders tend to cluster orders around such levels. 

The Relative Strength Index (RSI) is overbought, however, advising long-holders not to add to their long positions because of an increased risk of a pullback. Should RSI close back in neutral territory, it will be a sign for long-holders to close their positions and open shorts as a deeper correction is underway. Support lies at $2,700 (key level) and $2,685 (September high).  

Gold’s strong overall uptrend, however, suggests that any corrections are likely to peter out and the bull trend to resume.