Gold price hangs near daily low, seems vulnerable to extend its corrective slide
- Gold price attracts some sellers on Friday, though the downside remains cushioned.
- Bets for smaller Fed rate cuts revive the USD demand and weigh on the XAU/USD.
- Geopolitical risks and the US political uncertainty lend support to the precious metal.
Gold price (XAU/USD) maintains its offered tone near the lower end of its daily range through the first half of the European session and is pressured by a combination of factors. The US Dollar (USD), for now, seems to have stalled its corrective pullback from a nearly three-month high touched on Thursday amid bets for smaller rate cuts by the Federal Reserve (Fed). This, along with a generally positive risk tone, is seen undermining the safe-haven precious metal.
That said, a further downtick in the US Treasury bond yields is holding back the USD bulls from placing aggressive bets. Apart from this, the US political uncertainty ahead of the November 5 presidential election and a further escalation of tensions in the Middle East might offer some support to the Gold price. Traders now look forward to the US macro data – Durable Goods Orders and the revised Michigan Consumer Sentiment Index for short-term opportunities.
Daily Digest Market Movers: Gold price shows signs of bullish exhaustion amid smaller Fed rate cut bets, positive risk tone
- The US Dollar stalls the overnight retracement slide from a nearly three-month top amid bets for smaller rate cuts by the Federal Reserve and prompts fresh selling around the Gold price on Friday.
- Traders no longer expect another oversized interest rate cut by the Fed at its November monetary policy meeting as the incoming US macro data suggested that the economy remains on strong footing.
- This, along with deficit-spending concerns after the US presidential election, led to a sell-off in the US bond market and lifted the benchmark 10-year Treasury yield to a three-month top on Wednesday.
- The latest poll shows a tight race between Vice President Kamala Harris and the Republican nominee Donald Trump, which, along with geopolitical risks, could offer support to the safe-haven XAU/USD.
- Israel continued with its military assault on Iranian-backed Hezbollah in Lebanon and intensified a siege on northern parts of Gaza, raising the risk of a further escalation of tensions in the Middle East.
- Traders now look to Friday's US economic docket – featuring the release of Durable Goods Orders and the revised Michigan Consumer Sentiment Index – for short-term impetus heading into the weekend.
Technical Outlook: Gold price needs to break below $2,705 neckline support to confirm bearish head-and-shoulders pattern
From a technical perspective, the recent price action over the past week or so constitutes the formation of a bearish head and shoulders pattern on short-term charts. The neckline support of the said pattern is pegged near the $2,705 region, which should now act as an immediate strong support. Some follow-through selling, leading to a subsequent fall below the $2,700 mark, should pave the way for deeper losses and drag the Gold price further towards the $2,675 support. The downfall could extend further towards the bearish pattern target near the $2,660 area.
On the flip side, the $2,640-2,645 region now seems to have emerged as an immediate strong barrier. Meanwhile, a sustained strength beyond will negate the head-and-shoulders pattern and allow the Gold price to aim towards challenging the all-time peak, around the $2,658-2,659 area touched earlier this week. The subsequent move up could lift the XAU/USD towards the $2,770 zone, representing a nearly four-month-old ascending trend-line resistance, en route to the $2,800 round-figure 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.
