- Gold retreats from all-time high of $2,758 as US 10-year Treasury yields rise, reflecting fears of higher deficit spending under a potential Trump presidency.
- The US Dollar Index (DXY) hits a two-month high at 104.50, further weighing on Gold as risk appetite shifts toward safe-haven currencies.
- Traders now price in a 92% chance of a 25 bps Fed rate cut in November with another cut expected by year-end.
Gold price plunges from all-time high of $2,758 on Wednesday as US Treasury yields climbed, while the Greenback refreshes a two-month high, according to the US Dollar Index (DXY). At the time of writing, the XAU/USD trades at $2,716, down more than 1%.
Risk appetite has deteriorated, sponsoring a flight to safe-haven currencies, but not assets like the golden metal. The US 10-year Treasury note yield has climbed over 65 basis points (bps) since the Federal Reserve (Fed) cut rates by 50 basis points (bps) on September 18, amid fears that Trump’s presidency could be inflationary.
“The yields rising are implying a pro-growth administration is potentially coming into power and there’s some fear about deficit-spending,” said Thomas Hayes, chairman at Great Hill Capital in New York.
The US 10-year T-note yields 4.248%, gaining four basis points. The DXY, which measures the performance of the US currency against another six, edges up 0.42%, at 104.50.
Market participants are pricing a 92% chance that the Fed would lower rates by 25 bps at the next meeting in November and another one in December.
Investors seem convinced that former President Donald Trump could beat Vice-President Kamala Harris, as showed by most betting websites. As we get close to the US election on November 5, investors are taking shelter in view of that possibility. Investors are somewhat worried that Trump’s deficit-spending, use of tariffs and major illegal migrant deportation scheme could cause a new bout of inflation.
In the meantime, Middle East woes have faded somewhat, a relief for commodities like Crude Oil, which is also down 0.77% to $70.69 per barrel.
Daily digest market movers: Gold price on the defensive as US yields soar
- On Thursday, US Initial Jobless Claims for the week ending October 19 are expected to rise slightly from 241K to 242K.
- The S&P Global Manufacturing PMI for October is projected to improve from 47.3 to 47.5, while the Services PMI is estimated to dip from 55.2 to 55.
- Data from the Chicago Board of Trade, based on the December fed funds rate futures contract, indicates that investors estimate 47 basis points (bps) of Fed easing by the end of the year, which is slightly lower compared to a week ago.
XAU/USD technical outlook: Gold price retreats below $2,720
Gold price retreats sharply, forming a Bullish Engulfing candle chart pattern or an “outside day.” If confirmed, the yellow metal could be headed for a pullback, following the 5.96% rally that started on October 10.
From a momentum standpoint, sellers are gathering some pace. The Relative Strength Index (RSI) fell sharply from overbought conditions, opening the door for further downside.
In the case of a daily close below $2,719, look for a retracement. The first support would be the 38% Fibonacci Retracement at $2,699, followed by the 50% and 61.8% Fib Retracements at $2,681 and $2,662, respectively.
On the other hand, if XAU/USD clears today’s high at $2,750 the next stop would be the all-time record high at $2,758, followed by $2,800.
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.
