Gold (XAU/USD) continues scaling new record highs through the Asian session on Monday and climbs to the $4,078 region in the last hour amid a supportive fundamental backdrop. Investors remain worried about economic uncertainties on the back of a prolonged US government shutdown and rising geopolitical tensions. Apart from this, fresh US-China trade concerns turn out to be key factors underpinning demand for the safe-haven precious metal.
Meanwhile, the growing acceptance that the US Federal Reserve (Fed) will lower borrowing costs two more times this year keeps the US Dollar (USD) bulls on the defensive and further benefits the non-yielding Gold. That said, the risk-on impulse, fueled by US President Donald Trump’s softer tone on 100% China tariff, might cap the XAU/USD pair amid still overbought conditions and relatively thin liquidity on the back of a bank holiday in the US.
Daily Digest Market Movers: Gold buying remains unabated amid fresh trade tensions, dovish Fed bets
- The global risk sentiment took a turn for the worse on Friday after US President Donald Trump threatened an additional tariff of 100% on Chinese exports and announced new export controls on critical software effective November 1. In response, China accuses the US of double standards over the tariff threat and said that it could introduce its own unspecified countermeasures if the US president carries out his threat, adding that it was not afraid of a possible trade war.
- Trump, however, softened his stance over the weekend and posted on Truth Social that the US does not wish to hurt China. Trump added further that China’s economy will be fine and that both countries wish to avoid economic pain. Nevertheless, the escalating rhetoric fuels uncertainty over a potential meeting between Trump and Chinese President Xi Jinping later this year, pushing the Gold price to a fresh all-time peak during the Asian session on Monday.
- The US government shutdown is on track to extend into a third week as Congress remains deadlocked on a funding plan. Moreover, the Senate isn’t scheduled to hold any votes until Tuesday afternoon. Top House leaders signaled that there is virtually no appetite for their parties to cross the aisle and engage with the other side’s demands. Trump blamed Democrats for his decision to lay off thousands of federal employees, who began receiving notices on Friday.
- Trump, while aboard Air Force One, warned that he may send long-range Tomahawk missiles that could be used by Ukraine if Russia doesn’t settle the war soon. Trump added that the missiles would act as a new step of aggression if introduced in the Russia-Ukraine war. Russia has cautioned against Ukraine being provided with Tomahawk missiles. This keeps geopolitical risks in play and turns out to be another factor driving flows towards the safe-haven precious metal.
- According to the CME FedWatch tool, the possibility of a 25-basis-point interest rate cut by the Fed in October and December stands at around 96% and 87%, respectively. This, in turn, backs the case for a further appreciating move for the non-yielding yellow metal amid the lack of any US Dollar buying interest and relatively thin liquidity on the back of a bank holiday in the US.
Gold uptrend remains uninterrupted; multi-week-old ascending trend line holds the key for bulls
Friday’s bounce from the vicinity of a three-week-old ascending trend line support and the subsequent move up favor the XAU/USD bulls. However, still overbought conditions on short-term charts make it prudent to wait for some near-term consolidation or a modest pullback before positioning for any further gains.
Meanwhile, any corrective slide below the $4,020-4,018 area is more likely to attract fresh buyers near the $4,000 psychological mark. This should help limit the downside for the Gold price near the aforementioned trend line support, currently pegged near the $3,965-3,964 area. A convincing break below the latter, however, might prompt some technical selling and pave the way for a fall towards the $3,900 round figure.
Fed FAQs
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.
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.
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.
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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