Gold price bounces off daily low; bulls seem non committed amid stronger USD and risk-on mood
- Gold price reverses an intraday dip on Tuesday, albeit the upside potential seems limited.
- Geopolitical risks benefit the safe-haven bullion, though a stronger USD might cap gains.
- Signs of a slowdown in China – the biggest bullion consumer – warrant caution for bulls.
Gold price (XAU/USD) finds some support near the $2,638 region during the early European session on Tuesday and for now, seems to have stalled its modest pullback from over a one-week high touched the previous day. Persistent geopolitical risks and fears of a broader conflict in the Middle East turn out to be a key factor that offers some support to the safe-haven precious metal.
Any meaningful appreciating move for the Gold price, however, seems elusive amid sustained US Dollar (USD) buying, which remains well supported by expectations for a less aggressive policy easing by the Federal Reserve (Fed). Furthermore, the disappointment over China's fiscal stimulus failed to evoke investors' confidence and might contribute to capping gains for the XAU/USD.
Daily Digest Market Movers: Gold price attracts haven flows amid geopolitical risks
- The US Dollar shot to its highest level since August 8 on Monday amid growing acceptance of a less aggressive policy easing by the Federal Reserve and bets for a regular 25 basis points interest rate cut in November.
- Minneapolis Fed President Neel Kashkari said on Monday that the monetary policy is still restrictive and suggested that further modest interest rate cuts could be appropriate as the job market remains strong.
- Fed Governor Christopher Waller noted that the economy is on solid footing, may not be slowing as much as desired, and that the central bank should proceed with more caution on rate cuts than at the September meeting.
- The lack of numerical details for China's fiscal stimulus, along with signs of economic softness in the biggest bullion consumer, prompted some intraday selling around the Gold price on the first day of a new week.
- Israel vowed a forceful response to Hezbollah’s drone attack on its army base on Sunday, which killed four soldiers and severely wounded seven others, raising the risk of a further escalation of geopolitical tensions.
- This comes amid growing concern that Israel may mount an offensive against Iranian assets and a broader regional conflict in the Middle East, which offers some support to the safe-haven precious metal.
- Traders now look to the release of the Empire State Manufacturing Index, which, along with Fedspeak, should produce short-term trading opportunities around the XAU/USD later during the North American session.
Technical Outlook: Gold price might continue to face resistance near $2,666-2,667 area
From a technical perspective, the overnight swing high, around the $2,666-2,667 region, now seems to act as an immediate hurdle. A sustained strength beyond has the potential to lift the Gold price back towards the all-time peak, around the $2,685-2,686 region touched in September. This is closely followed by the $2,700 round-figure mark, which if cleared decisively will set the stage for an extension of a well-established multi-month-old uptrend.
On the flip side, weakness below the $2,632-2,630 immediate support is likely to attract some buyers and remain limited near the $2,600 round-figure mark. Failure to defend the said handle will be seen as a fresh trigger for bearish traders and make the Gold price vulnerable to accelerate the fall towards the next relevant support near the $2,560 zone. The corrective slide could extend further towards the $2,535-2,530 region en route to the $2,500 psychological mark.
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.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
