Gold price recaptures five-month high as Middle East tensions escalate

  • Gold price extends upside as Israel prepares to attack Hamas group.
  • Fed Chair Powell supported neutral interest rates amid higher US bond yields.
  • 10-year US Treasury yields jump above 4.9% amid unsustainable Congress budget deficits.

Gold price (XAU/USD) rose sharply as Middle East tensions kept escalating and the Federal Reserve (Fed) Chair Jerome Powell endorsed a stable interest rate policy in his speech on Thursday. The demand for bullion strengthened as Israeli troops prepared to enter the Gaza strip with the goal of dismantling Hamas, the Palestinian military group. Meanwhile, despite the promise of humanitarian aid for civilians in Gaza by US President Joe Biden, Iran could step in and intervene directly in the conflict, which could turn into a feared Middle East regional war.

On Thursday, Fed Chair Jerome Powell joined his teammates – Philip Jefferson, Austan Goolsbee, Michael Barr, and Raphael Bostic – and delivered neutral guidance on interest rates in his speech at the Economic Club of New York. Powell acknowledged that multi-year high US Treasury yields are significantly impacting overall spending and investment.

In an interview with CNBC, Atlantic Fed Bank President Raphael Bostic said that a slowdown is coming due to higher interest rates but the economy won’t see a recession. Bostic remains confident that the central bank will get inflation under control. He forecasted that the Fed would cut interest rates in late 2024.

Philadelphia Fed Bank President Patrick Harker, in an interview on Friday, favored holding interest rates as the economy is softening than thought.

Daily Digest Market Movers: Gold price soars as Middle East tensions keep bullions' demand

  • Gold price keeps rallying having just breached the $1,980 resistance amid tailwinds coming from the Federal Reserve and Middle East.
  • The Israel-Palestine conflict has extended for 14th day now and Israel's defense chief Yoav Gallant is getting his troops ready to enter Gaza, aiming to dismantle the Hamas military.
  • US President Joe Biden has called for urgent humanitarian aid for civilians in Gaza. After visiting  Israel, Biden said ‘loud and clear’ that the US stands with Israel.
  • Gold bullion demand remains upbeat due to persistent risks of Iran’s intervention in the Middle East conflict, which would effectively make it a regional war.
  • Meanwhile, rising expectations supporting an unchanged interest rate decision by the Fed on November 1 have strengthened the appeal for Gold.
  • Jerome Powell supported a potential halt in interest rates while addressing monetary policy prospects at the New York Economic Club, as expected. He acknowledged that rising US Treasury yields have significantly tightened overall financial conditions. 
  • The 10-year US Treasury yields have come closer to 5% amid unsustainable United States budget deficits, and rising interest rates.
  • Jerome Powell acknowledged that the US economy is resilient. The labor demand has been upbeat and consumer spending has remained strong despite significant efforts to ease inflation through raising interest rates.
  • Over the interest rate outlook, Powell said that further policy-tightening would be largely dependent on economic indicators, evolving outlook, and geopolitical tensions. 
  • After Powell’s commentary, trader bets for unchanged interest rates in the November meeting rose significantly, a bullish development for Gold. Per the CME Fedwatch tool, traders see an almost 100% chance of the Fed keeping interest rates unchanged at 5.25-5.50%. The odds of one more interest rate increase in any of the two remaining monetary policy meetings in 2023 have dropped to 20%.
  • Analysts at Wells Fargo said that higher yields and more broadly tightening financial conditions were “doing the Fed’s work for it” by tamping down growth, thus helping cool inflation.
  • Dallas Fed Bank President Lorie Logan said on Thursday that she is unsure about consumer inflation declining to 2% and emphasized the need for weakness in the job market to achieve price stability.
  • Lorie Logan cited that higher bond yields and recent economic data have bought some time for the central bank to keep interest rates unchanged.
  • Friday’s US economic docket is light, with Fed’s Harker due to speak at 13:00 GMT and the Monthly Budget Statement expected to be released later in the US session.

Technical Analysis: Gold price climbs close to $1,990

Gold price extends upside to near $1,990.00 amid multiple tailwinds. The precious metal is on a three-day winning streak and is expected to recapture a five-month high of around $1,987.00. The ultimate resistance for the Gold price is seen at $2,000.00. The 20 and 50-day Exponential Moving Averages (EMAs) have climbed above the 200-day EMA, which indicates that the upside bias has strengthened. The Relative Strength Index (RSI) (14) climbs above 60.00, warranting more upside in the Gold price amid the absence of divergence and overbought signals.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.

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