Gold price soars as escalating Middle East tensions improve safe havens' demand


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  • Gold price revives strongly as investors flee to safe assets as Israel-Hamas war escalates.
  • The US Dollar and bond yields capitalize on hot headline inflation data.
  • Fed’s Collins says that persistent rise in US yields could diminish the need for further policy-tightening.

Gold price (XAU/USD) has delivered a stalwart rally on increasing geopolitical tensions in the Middle East and hopes that the Federal Reserve (Fed) won't raise interest rates further this year. The precious metal has strengthened after reviving from the knee-jerk move on Thursday, a result of the United States Consumer Price Index (CPI) report for September showing headline inflation above expectations. The yellow metal recovered quickly as traders’ bets for an unchanged interest rate decision by the Fed at its November monetary policy meeting became even more pronounced. This was due to the CPI’s core inflation reading softening in line with expectations. Headline inflation turned out hotter than consensus as higher global oil prices added to the price index.

Meanwhile, neutral commentary from Philadelphia Fed President Patrick Harker has also supported the Gold price. Fed Harker cited that fears of persistent inflation remained absent in the recent data, allowing the central bank to keep interest rates unchanged ahead.

The US Dollar and bond yields also recovered as persistent inflation data lifted the odds of one additional interest rate hike by the Fed in the remainder of 2023. The appeal for Gold increases as geopolitical risks have risen due to deepening tensions in the Middle East. Israel's military has asked more than one million people in Northern Gaza to evacuate their homes, signaling a potential intensification of the war in the area. Meanwhile, investors shift focus to Fed Chair Jerome Powell’s speech, scheduled for next week, which will provide cues about the likely monetary policy action taken at the November 1 meeting.

Daily Digest Market Movers: Gold price strengthens on elevated neutral Fed bets

  • Gold price rose vertically to near $1,920.00 after recovering swiftly from the knee-jerk reaction that was triggered by the release of the US CPI data for September, released on Thursday. 
  • The precious metal is set to deliver its best week in seven months due to deepening Israel-Hamas tensions and rising expectations that the Fed will not raise interest rates further this year.
  • September’s inflation report conveyed that headline inflation rose at a higher pace of 0.4% against expectations of 0.3% due to rising prices of gasoline and food products. The annual headline CPI data grew at a steady pace of 3.7% but remained higher than expectations of 3.6%.
  • The monthly and annual core inflation that excludes volatile oil and food prices rose by 0.3% and 4.1%, respectively, as expected. 
  • The steadily sinking core inflation data was followed by a solid recovery in the US Dollar Index (DXY) as it rose to 106.60 from its 15-day low of 105.35.
  • The appeal for the US Dollar has improved significantly as scrutiny of the economic data for September released so far conveys that the US economy is resilient. The labor market conditions remained upbeat, factory activities improved, and the Services PMI remained above the 50.0 threshold. 
  • Fears of a global slowdown remain persistent as China’s inflation turned out stagnant in September, while investors forecasted growth of 0.2%. The Chinese economy is struggling to recover due to poor demand amid a rising jobless rate.
  • The 10-year US Treasury yields revived strongly to near 4.65% as investors expected that inflationary pressures above the desired rate of 2% would be the hard nut to crack for Federal Reserve (Fed) policymakers.
  • A persistent US inflation report has lifted bets for one more interest rate increase from the Fed in the remainder of 2023. 
  • As per the CME FedWatch Tool, traders see a 92% chance of the Fed keeping interest rates unchanged at 5.25 to 5.50%. The odds of one more interest rate increase in any of the two remaining monetary policy meetings in 2023 are around 30%.
  • A minority of investors expect that the Fed will end up hiking interest rates later this year by an additional 25 basis points (bps) to 5.50 to 5.75% to ensure the achievement of price stability in a timely manner.
  • Boston Fed Bank President Susan Collins confirmed on Thursday that one additional interest rate hike is not off the table but warned that if US bond yields remain higher the appeal for further policy tightening would diminish.
  • Fed Governor Christopher J. Waller supports a “wait and watch” approach as 10-year US Treasury yields have risen sharply in recent weeks. Market watchers hope that higher yields are sufficient to reduce overall spending and investment and thus control inflation.
  • Meanwhile, the University of Michigan reported that Consumer Confidence Index declined to 63.0 in October vs. 67.4 expected and the former reading of 68.1.
  • On Thursday, the US Department of Labor reported that Weekly Jobless Claims remained almost unchanged last week. Individuals claiming jobless benefits for the week ending October 6 remained steady at 209K, a little lower than expectations of 210K.
  • Going forward, investors shift focus to the speech from Fed Chair Jerome Powell, which is scheduled for Oct 19 before the Economic Club of New York. Investors would watch for November’s monetary policy framework and the outlook on inflation and the economy.

Technical Analysis: Gold price aims to stabilize above $1,900

Gold price roars to a fresh two-week high near $1,920.00 as the odds for an unchanged interest rate decision by the Fed at November’s monetary policy meeting remained unflinchingly high despite the CPI’s hint of continuing inflationary pressure. The precious metal climbs above the 200-period Exponential Moving Average (EMA), which trades around $1,900, indicating that the long-term trend has turned bullish. Momentum oscillators approached bullish territory.

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.

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