- Gold price drifts lower for the seventh day and drops to a near seven-month low on Tuesday.
- The Fed’s hawkish outlook, elevated US bond yields and a bullish USD continue to weigh.
- The risk-off mood helps the safe-haven XAU/USD to pause the slide amid oversold conditions.
Gold price (XAU/USD) has been trending lower after the Federal Reserve (Fed) warned that sticky inflation was likely to attract at least one more interest rate hike in 2023 and reiterated the higher-for-longer narrative in September. Moreover, the incoming resilient macro data from the United States (US) supports prospects for further policy tightening by the Fed and remains supportive of elevated US Treasury bond yields. This, in turn, lifts the US Dollar (USD) to its highest level since November 2022 and drives flows away from the non-yielding yellow metal.
The downward trajectory remains uninterrupted for the seventh successive day on Tuesday and drags the Gold price to the $1,815 level, or its lowest level since March 9 during the Asian session. That said, a generally weaker tone around the equity markets lends some support to the safe-haven precious metal and helps limit losses amid extremely oversold conditions on the daily chart. That said, the fundamental backdrop suggests that the path of least resistance for the XAU/USD is to the downside and any meaningful recovery attempt might still be seen as an opportunity for bearish traders.
Daily Digest Market Movers: Gold price pauses its recent sharp decline to a multi-month low
- Gold price registers its longest losing streak since August 2022 in the wake of rising bets for more interest rate hikes by the Federal Reserve.
- Fed officials reiterate that monetary policy will need to stay restrictive for some time to bring inflation back down to the 2% target.
- Fed Governor Michelle Bowman is willing to support raising rates further if the incoming data indicates that progress on inflation has stalled or is too slow.
- Fed Vice Chair Michael Barr said that the important question at this point is how long to hold rates at a sufficiently restrictive level to achieve the goals.
- Cleveland Fed President Loretta Mester also said that risks to inflation are tilted toward the upside and higher rates are needed to make sure the disinflation process continues.
- The US ISM Manufacturing PMI recorded its highest reading since November 2022 and increased to 49.0 in September, marking improvement for the third straight month.
- Moreover, the rise in consumer spending, along with surging gasoline prices, points to higher prices going forward and supports prospects for further policy tightening.
- Markets are now pricing in a 45% chance of another 25 basis point (bps) rate hike this year and the outlook pushes the yield on the benchmark 10-year US government bond to a 16-year peak.
- The US Dollar also advances to its highest level since November 2022 and continues to undermine the Gold price. Bulls fail to gain any respite from a weaker risk tone.
- Bearish traders take a breather in the wake of the prevalent risk-off environment, which tends to benefit the traditional safe-haven XAU/USD.
Technical Analysis: Gold price finds some support near the $1,815 area, bearish potential seems intact
The Relative Strength Index (RSI) on the daily chart is flashing extremely oversold conditions which make its prudent to wait for some near-term consolidation or a modest bounce before positioning for a further depreciating move. The lack of any buying interest, meanwhile, suggests that the downtrend is still far from being over. Hence, a subsequent slide towards testing the next relevant support, around the $1,800 round-figure mark, looks like a distinct possibility. Some follow-through selling will expose the next relevant support near the $1,770-1,760 region. On the flip side, any attempted recovery might now confront stiff resistance and remain capped near the $1,830-1,832 horizontal zone. A sustained strength beyond, however, might trigger a short-covering rally and lift the yellow metal to the $1,850 intermediate hurdle en route to the $1,858-1,860 strong barrier.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
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