- Gold drops to a daily low of $2,604 amid truce hopes between Israel and its neighbors.
- Safe-haven demand weakens as Hezbollah supports ceasefire efforts, while rising US Treasury yields further weigh on Bullion.
- Traders adjust Fed rate cut expectations with focus shifting to upcoming US inflation data, jobless claims and consumer sentiment.
Gold prices slumped sharply on Tuesday following a strong US jobs report and newswires revealing that Hezbollah supported calls for a truce in the conflict between them and Israel. Hence, hints of a possible de-escalation of the Middle East conflict opened the door for traders to book profits. The XAU/USD trades at $2,615, down more than 1%.
US equities remain underpinned by an improvement in market mood. Bullion remained near year-to-date (YTD) highs due to fears of further escalation of the Middle East hostilities. However, signs of a possible solution to the conflict would trigger outflows from safe-haven assets to riskier ones. According to CNN, “Hezbollah supports efforts aimed at achieving a ceasefire in Lebanon, its top official said on Tuesday.”
This sponsored a sell-off in XAU/USD, which tumbled over $35 to a daily low of $2,604 before buyers lifted prices to current spot prices. Additionally, the jump in US Treasury yields weighed on the non-yielding metal. The US 10-year benchmark note rate remains unchanged above 4%, yet it’s up over six basis points this week after last Friday’s September Nonfarm Payrolls (NFP) report.
Given the backdrop, interest rate traders adjusted their expectations about the Federal Reserve’s (Fed) next move. Most Fed speakers crossing the wires adopted a gradual tone regarding easing monetary policy. However, some, like St. Louis Fed President Alberto Musalem, projected only one additional cut toward the end of the year after backing September’s 50 bps cut.
In the meantime, the Greenback clings to minimal gains as next week the US docket will feature the release of inflation data, the Fed’s last Meeting Minutes, Initial Jobless Claims, and the University of Michigan Consumer Sentiment.
Daily digest market movers: Gold price plunges on hopes of truce in Middle East
- The US Dollar Index (DXY), which tracks the buck’s value against a basket of six currencies, is at 102.52, virtually unchanged but at levels last seen in August 2024.
- Following the last US jobs report, recession fears faded. Therefore, most Wall Street banks like Citi, JP Morgan and Bank of America revised its November Fed call from a 50 to 25 bps rate cut.
- According to CME FedWatch Tool data, the odds for a 25 bps Fed rate cut are 85.3%. Meanwhile, the chances of lowering rates by 50 bps are 0%, but they increased to 14.7% for a hold.
- Meanwhile, the People’s Bank of China (PBoC) halted its Bullion purchases for the fifth month. China’s reserves were unchanged as their holdings stood at 72.8 million troy ounces at the end of last month.
XAU/USD technical analysis: Gold price slips as sellers eye support underneath $2,650
Gold prices dropped below $2,650 on Tuesday, which could open the door for a deeper pullback. After briefly testing the $2,605 area, it has recovered some ground. But so far, it has failed to gain traction to aim higher and surpass the $2,650 mark.
Momentum shows that bears are stepping up as the Relative Strength Index (RSI), despite being bullish, is aggressively aiming lower.
Once XAU/USD dropped below the September 30 low of $2,624, it sponsored a leg toward the $2,600 mark. On further weakness, the following floor will be the 50-day Simple Moving Average (SMA) at $2,534.
Conversely, if Gold prints a daily close above $2,650, the XAU/USD needs to clear $2,670 to challenge the YTD high of $2,685. Up next will be the $2,700 mark.
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.
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