Gold price remains depressed amid smaller Fed rate cut bets; lacks follow-through selling

• Gold price ticks lower for the second straight day amid smaller Fed rate cut bets and a bullish USD. 
• Signs of a slowdown in China – the biggest bullion consumer – further undermine the XAU/USD.
• Geopolitical risks could offer some support to the safe-haven bullion and help limit the downside.

Gold price (XAU/USD) attracts sellers for the second straight day on Tuesday and moves further away from over a one-week high touched the previous day. Firming expectations for a less aggressive policy easing by the Federal Reserve (Fed) and bets for a regular 25 basis points (bps) rate cut in November remain supportive of the recent US Dollar (USD) rally to its highest level since August 8. This, along with the prevalent risk-on environment, is seen undermining demand for the yellow metal. 

Meanwhile, the disappointment over China's fiscal stimulus and weak inflation figures released over the weekend did little to evoke investors' confidence. This further contributes to driving flows away from the Gold price, though persistent geopolitical risks stemming from the ongoing conflicts in the Middle East might help limit deeper losses. This, in turn, warrants some caution before placing aggressive bearish bets around the XAU/USD and positioning for a further intraday depreciating move.

Daily Digest Market Movers: Gold price is pressured by bullish USD, positive risk tone

• The US Dollar shot to its highest level since August 8 on Monday amid growing acceptance of a less aggressive policy easing by the Federal Reserve and bets for a regular 25 basis points interest rate cut in November. 
• Minneapolis Fed President Neel Kashkari said on Monday that the monetary policy is still restrictive and suggested that further modest interest rate cuts could be appropriate as the job market remains strong.
• Fed Governor Christopher Waller noted that the economy is on solid footing, may not be slowing as much as desired, and that the central bank should proceed with more caution on rate cuts than at the September meeting.
• The lack of numerical details for China's fiscal stimulus, along with signs of economic softness in the biggest bullion consumer, prompted some intraday selling around the Gold price on the first day of a new week. 
• Israel vowed a forceful response to Hezbollah’s drone attack on its army base on Sunday, which killed four soldiers and severely wounded seven others, raising the risk of a further escalation of geopolitical tensions. 
• This comes amid growing concern that Israel may mount an offensive against Iranian assets and a broader regional conflict in the Middle East, which offers some support to the safe-haven precious metal. 
• Traders now look to the release of the Empire State Manufacturing Index, which, along with Fedspeak, should produce short-term trading opportunities around the XAU/USD later during the North American session. 

Technical Outlook: Gold price downside potential seems limited, $2,632-2,630 holds the key

From a technical perspective, the overnight swing high, around the $2,666-2,667 region, now seems to act as an immediate hurdle. A sustained strength beyond has the potential to lift the Gold price back towards the all-time peak, around the $2,685-2,686 region touched in September. This is closely followed by the $2,700 round-figure mark, which if cleared decisively will set the stage for an extension of a well-established multi-month-old uptrend.

On the flip side, weakness below the $2,632-2,630 immediate support is likely to attract some buyers and remain limited near the $2,600 round-figure mark. Failure to defend the said handle will be seen as a fresh trigger for bearish traders and make the Gold price vulnerable to accelerate the fall towards the next relevant support near the $2,560 zone. The corrective slide could extend further towards the $2,535-2,530 region en route to the $2,500 psychological mark.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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