Gold (XAU/USD) sticks to modest intraday gains through the early European session and currently trades just below a nearly three-week high touched this Tuesday. Worries about the potential economic fallout from the longest-ever US government shutdown turned out to be a key factor that continues to underpin demand for the safe-haven commodity. This, along with expectations for another rate cut by the US Federal Reserve (Fed) in December, further acts as a tailwind for the non-yielding yellow metal.
Meanwhile, a positive development towards reopening the US government provides an additional boost to the already upbeat market mood. Apart from this, the emergence of some US Dollar (USD) buying is holding back traders from placing aggressive bullish bets around the XAU/USD pair amid relatively thin trading volumes on the back of a bank holiday in the US. However, dovish Fed expectations could limit further USD gains and suggest that the path of least resistance for the Gold price is to the upside.
Daily Digest Market Movers: Gold continues to be underpinned by economic concerns and Fed rate cut bets
- The Senate late on Sunday reached a compromise and moved forward on a measure aimed at ending the longest US government shutdown in American history that began on October 1. Investors keenly await the expected flood of delayed data to shed more light on growth amid fears about an economic fallout from the US government closure.
- In fact, the University of Michigan’s Survey showed on Friday US Consumer Sentiment Index slumped to 50.3 in November, or the lowest level since June 2022, from the previous month’s final reading of 53.6. Moreover, investors seem tilted towards a more dovish US Federal Reserve, which continues to lend support to the non-yielding Gold.
- According to the CME Group’s FedWatch Tool, markets now see an over 60% chance of another rate cut by the Fed in December. This, in turn, fails to assist the US Dollar in attracting any meaningful buyers and favors the XAU/USD bulls. However, the risk-on environment warrants some caution before positioning for a further appreciating move.
- US banks will be closed on Tuesday in observance of Veterans Day, leaving the USD and the commodity at the mercy of Fed rate cut expectations. Hence, speeches from influential FOMC members on Wednesday will be looked for more cues about the Fed’s future rate-cut path, which should provide a fresh impetus to the non-yielding yellow metal.
Gold bulls now await move beyond $4,155-4,160 hurdle before placing fresh bets
From a technical perspective, the XAU/USD pair now seems to have found acceptance above the 50% retracement level of the recent sharp corrective decline from the all-time peak, touched in October. This, along with positive oscillators on the daily chart, validates the near-term positive outlook for the Gold price. Some follow-through beyond the $4,155-4,160 area will reaffirm the bullish bias and allow the bullion to aim towards reclaiming the $4,200 round figure. The said handle nears the 61.8% Fibonacci retracement level, which, if cleared decisively, would set the stage for additional gains.
On the flip side, the Asian session low, around the $4,115 region, closely followed by the $4,100 round figure and the $4,075 region (38.2% Fibo. retracement level), now seems to protect the immediate downside. Failure to defend the said support levels might prompt some technical selling and drag the Gold price to the $4,025 region en route to the $4,000 psychological mark. A convincing break below the latter might shift the near-term bias in favor of bearish traders and make the XAU/USD pair vulnerable to accelerate the fall towards the $3,936-3,935 region before eventually dropping to the $3,900 round figure.
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.