- Gold hits a new record high, driven by expectations of a Fed rate cut in November and falling US Treasury yields.
- Mixed US economic data reveals manufacturing weakness but services sector resilience, according to S&P Global Flash PMIs.
- Fed officials express caution about aggressive rate cuts, maintaining flexibility in policy while noting growing labor market risks.
- Rising tensions between Israel and Hezbollah heighten safe-haven appeal, potentially driving further demand for Gold.
Gold’s price rose marginally on Monday, hitting an all-time high above $2,630, fueled by increasing bets that the US Federal Reserve (Fed) will lower interest rates in November. The XAU/USD trades at $2,627, registering more than 0.20% gains.
US equities showed an improvement in risk appetite on Monday. Bullion traders reached record peaks during the last two trading days, irrespective of a firm US Dollar. The main driver seems to be the drop in US Treasury yields, with the 10-year T-note yielding 3.741%, failing to edge higher amid the Fed speaker’s pullback against aggressively lowering rates.
Data from the United States (US) was mixed. S&P Global revealed its Flash PMIs, painting a gloomy outlook for manufacturers, while the services sector remained resilient despite decelerating modestly compared to August’s data.
In the meantime, the Atlanta Fed GDP Now model projects the economy to grow 2.9% in Q3 2024, even though the labor market has softened.
On Monday, Fed regional presidents acknowledged that the risks of a weakening labor market have increased. Nonetheless, they pushed back against lowering interest rates at a 50 bps pace, keeping their options open for future meetings and signaling a gradual approach.
This capped the XAU/USD rally, though heightened tensions in the Middle East conflict between Israel and Hezbollah could dampen the risk appetite and increase Gold prices. According to the Associated Press, the US is sending more troops to the Middle East as violence has risen, the Pentagon said Monday.
Daily digest market movers: Gold price holds gains despite Fed commentary
- US S&P Global Manufacturing PMI in September deteriorated further from 47.9 in August to 47.0, below forecasts of 48.5.
- The S&P Global Services PMI expanded by 55.4, above estimates of 55.3 but beneath the previous month’s 55.7, hinting that the US economy is decelerating.
- According to the World Gold Council, global physically-backed Gold ETFs saw modest net inflows of 3 metric tons last week.
- Minneapolis Fed President Neel Kashkari stated that the Fed remains data-dependent, affirming that the 50 bps rate cut was “the right decision” and projected the fed funds rate to end at 4.4% in 2024.
- Atlanta Fed President Raphael Bostic remarked that the half-point cut “does not lock in a cadence for future rate cuts” while acknowledging that labor market risks have increased.
- Chicago Fed President Austan Goolsbee added that more rate cuts will be needed next year.
XAU/USD technical outlook: Gold poised for retracement before extending gains
The XAU/USD is upwardly biased, though the rally seems overextended. Gold’s price action remains subdued within an anemic $20 range.
The Relative Strength Index (RSI) has turned overbought, hinting that buyers are in charge but that a pullback might be on the cards.
Expect a leg-down if XAU/USD drops below the September 18 daily high at $2,600. The following key support levels to test will be the September 18 low of $2,546, followed by the 50-day Simple Moving Average (SMA) at $2,481.
Conversely, if XAU/USD clears the all-time high (ATH) of $2,634, traders could eye the $2,650 area, followed by 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.
