Gold holds gains on bets for more Fed cuts, Middle East tensions

• Gold continues its uptrend as markets continue to price in more interest rate cuts from the Fed.
• Such discounts would make gold, a non-yielding asset, more attractive.
• Rising tensions between Israel and Lebanon increase demand for the precious metal haven.

Gold (XAU/USD) retreated slightly during the European session on Monday after being pushed to a new all-time high (ATH) of $2,631 earlier in the day as markets continue to price in more aggressive interest rate cuts from the federal side. Reserves (Fed) as rising geopolitical tensions in the Middle East increase haven demand for the precious metal.

As for Fed rate cuts, lower interest rates are positive for gold because they lower the opportunity cost of holding the non-interest-paying asset, making it more attractive to investors.

As such, the decision by the People’s Bank of China (PboC) to cut its 14-day repo rate by 10 basis points (bps) to 1.85% early on Monday, as well as injecting additional liquidity into the financial system, likely added and more. to the attractiveness of Gold.

Gold hits new highs as market predicts more cuts to come

Gold rises to new ATHs on Monday as the market prices a possible further double-dose rate cut from the Federal Reserve before Christmas. The odds that the Fed will cut interest rates again by 50 bps (0.50%) at its next meeting in November are currently 51.6% versus 48.4% for a 25bps cut, according to CME’s FedWatch tool.

Recent commentary from Federal Reserve (Fed) Bank of Philadelphia Patrick Harker (Voting Member) on Friday evening suggested that while the labor market may be softening, there is a risk that “inflation declines could stagnate.” His comments scored a 5.8 on FXStreet’s FedTracker, which rates the tone of Fed officials’ speeches on a scale of 0 to 10 using a custom AI model.

Next week sees more comments from Fed members that could affect expectations about Fed policy and the price of gold:

• On Monday, Fed Bank of Atlanta President Raphael Bostic (voter – dovish) opens proceedings, followed by Fed Bank of Chicago President Austan Goolsbee (non-voter – dovish), who “could signal he’s looking for a continuation of the big rate cut” according to to Jim Reid, Head of Macro Research at Deutsche Bank. Also scheduled to speak later in the day is Minneapolis Federal Reserve Bank President Neel Kashkari.
• On Tuesday, Federal Reserve Governor Michelle Bowman (voter – solicit) delivers a speech on the US economic outlook and monetary policy at the annual Kentucky Bankers Association Convention.
• Fed Board of Governors member Adriana Kugler (voter – neutral) speaks on Wednesday and then takes part in a conversation with Boston Fed President Susan Collins (non-voter – dovish) on Thursday.
• Also on Thursday, Fed Board member Michelle Bowman will speak – she was the first governor to dissent at an FOMC since 2005. On the same day, the 10th annual US Treasury Market Conference takes place. Fed Governor Jerome Powell opens it with pre-recorded remarks.
• Also speaking at the same conference will be New York Fed President John Williams (voter – dovish) and Fed Supervisory Vice President Michael Barr (voter – dovish).

The UN warns of a catastrophe in the Middle East

The United Nations (UN) has warned that the Middle East is on the brink of catastrophe as Israel and Lebanon move closer to all-out war.

Over the weekend, Israel struck targets in Lebanon and Hezbollah retaliated with rocket strikes in northern Israel. Israel may stage a ground invasion of Lebanon, further escalating the war. Such an event would likely push up the price of gold.

“If Hezbollah doesn’t budge, which I don’t think they will, because fighting Israel is deep in their DNA, Israel has said it will ‘do more’,” says Jeremy Bowan, BBC international editor. “It could be some sort of ground operation involving sending tanks and troops into Lebanon. And that, I think, then gets into a very escalating and dangerous situation,” Bowan added.

Technical Analysis: Gold’s Uptrend Extends

Gold extends its uptrend, reaching new record highs on Monday. Given the principle in technical analysis that “the trend is your friend,” the odds favor a greater upside for the yellow metal in line with the dominant long-, medium-, and short-term trends.

XAU/USD Daily Chart

The next upside targets are the round numbers: first $2,650 and then $2,700.

Gold entered overbought levels on Friday, according to the Relative Strength Index (RSI). This advises traders not to add to their long positions. If gold breaks out of overbought, it will be a sign for them to close out long positions and sell short, as it would suggest that a deeper correction is underway.

If a correction develops, firm support is at $2,600 (September 18 high), $2,550 and $2,544 (0.382 Fibonacci retracement of the September rally).