Gold price falls on cheerful sentiment, no advancement in Middle East tensions
- Gold price pares some gains as US long-term bond yields rebound.
- The precious metal fails to hold gains inspired by soft US Nonfarm Payrolls data.
- Investors anticipate the Fed is done hiking interest rates.
Gold price (XAU/USD) trades around $1,985 on Monday, retreating from Friday’s highs at over $2,000, as US long-term bond yields rebound. The yellow metal is paring back some of the gains registered on Friday after the release of the US employment report for October, which showed softer growth in both jobs and wages. Despite the recent retreat, Gold’s downside remains cushioned by persistent geopolitical tensions in the Middle East as the Israeli authorities reject the proposal for a ceasefire, keeping safe-haven bids firm.
The US Dollar remains on the backfoot as market participants now view the US labor market loosening, which would allow Fed policymakers to advocate for keeping interest rates unchanged in the range of 5.25%-5.50% till the end of 2023. US export orders have fallen sharply due to higher exchange rates for the US Dollar.
Daily Digest Market Movers: Gold price drops as appeal for safe-haven assets fade
- Gold price surrenders gains generated on Friday as US bond yields tick higher. This week, many Federal Reserve (Fed) policymakers are lined up to speak, probably providing further guidance on interest rates. Fed Chair Jerome Powell will speak on Wednesday.
- Richmond Fed President Thomas Barkin said on Friday that it would be early to deliver commentary about interest rates as two inflation reports will be released before the monetary policy meeting in December.
- 10-year US Treasury yields rose to 4.60% on Monday but downside risks are high on expectations that the Fed is done hiking interest rates.
- Minneapolis Federal Reserve Bank President Neel Kashkari said that there is a lot of uncertainty about what is driving long-term yields higher and supported keeping interest rates unchanged in the range of 5.25%-5.50% on November 1.
- As per the CME Fedwatch tool, traders see more than a 90% chance of an unchanged interest rate decision from the Fed in December.
- Gold price witnessed buyers’ interest on Friday after the US NFP report showed weak hiring and tempered wage growth in October.
- US employers added 150K jobs in October against a downwardly revised 297K reading in September. Economists forecasted a higher increase of 180K. The Unemployment rate rose to 3.9% against the consensus and the former reading of 3.8%.
- A slowdown in job growth in October was already anticipated as at least 30K workers of the United Auto Workers (UAW) union went on strike against Detroit's "Big Three" car makers.
- The monthly Average Hourly Earnings rose at a slower pace of 0.2% in October against 0.3% growth in September.
- Annual wage growth rose by 4.1% in October, remaining between expectations of 4.0% and the former reading of 4.2%. While upside risks to wage growth have eased, inflation is still stubborn as Average Hourly Earnings remain above 3.5%, which economists see as consistent with the Fed's 2% target.
- In addition to the labor market data, the Services PMI remained downbeat. The ISM Services PMI, which is a sector that accounts for two-thirds of the US economy, declined to 51.8 against expectations of 53.0 and the 53.6 reading from September.
- Contrary to the downbeat Services PMI, New Orders for the service industry rose significantly to 55.5 against 51.8 in September.
- Meanwhile, investors seek fresh developments on the Israel-Palestine war for further action in the non-yielding safe-haven asset. Israeli Prime Minister Benjamin Netanyahu rejected ceasefire calls when he met with US Secretary of State Antony Blinken on Friday.
Technical Analysis: Gold price stabilizes below $1,990
Gold price retreats from the psychological resistance of $2,000 as US long-term bond yields recover. Broadly, the precious metal has been consolidating in a range between $1,970 and $2,010 for more than two weeks.
On a daily time frame, Gold price demonstrates signs of inventory adjustment between retail participants and institutional investors. Upward-sloping 20-day and 50-day Exponential Moving Averages (EMAs) indicate that the long-term trend is bullish.
Risk sentiment FAQs
What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?
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.
What are the key assets to track to understand risk sentiment dynamics?
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.
Which currencies strengthen when sentiment is "risk-on"?
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.
Which currencies strengthen when sentiment is "risk-off"?
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
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
