Rising geopolitical tensions are helping XAU/USD hold ground

VaselineOctober 4, 2024

0 5 minutes read

Rising geopolitical tensions are helping XAU/USD hold ground

Gold lost its bullish momentum after setting a new high the previous week.
The technical outlook suggests that sellers remain on the sidelines.
Investors will be closely watching geopolitics and US inflation data next week.

Gold (XAU/USD) struggled to make a decisive move in either direction this week as overall strength in the US dollar (USD) offset rising safe-haven demand for the precious metal. Developments around the Middle East conflict and US inflation data could drive XAU/USD action next week.

Gold ignores renewed USD strength

Gold started the new week under bearish pressure and lost nearly 1% on Monday. While speaking at the annual meeting of the National Association for Business Economics, Federal Reserve (Fed) Chairman Jerome Powell refrained from offering new hints about the next policy step. Powell reiterated that the risks are both sides and that they will make policy decisions on a meeting-by-meeting basis. “The Fed is in no rush to cut rates quickly, it will be guided by the data,” he added. These comments allowed the USD to hold and forced XAU/USD to remain on the back foot.

Although the USD held on to its strength on Tuesday after the US Bureau of Labor Statistics (BLS) reported that JOLTS job openings rose to 8.04 million in August from 7.71 million in July, gold benefited from escalating geopolitical tensions and gained over 1% to erase all of Monday’s losses. Reports that the Israeli military has staged a ground invasion of Lebanon have revived fears of a deepening and widening conflict in the Middle East.

Early on Wednesday, news that Iran had fired about 200 ballistic missiles at Israel and Israel vowing to retaliate against the attack helped Gold find demand. Israeli Prime Minister Benjamin Netanyahu said Iran had made a “big mistake” and “will pay,” further escalating tensions. However, as the USD recovery gained momentum in the second half of the day, XAU/USD struggled to gain bullish momentum and ended the day little changed. Automatic Data Processing (ADP) reported that private sector employment rose by 143,000 in September, beating market expectations of 120,000 and supporting USD.

Data released by the Institute for Supply Management (ISM) showed on Thursday that business activity in the services sector continued to expand at an accelerated pace in September, with the ISM Services Purchasing Managers’ Index (PMI) improving to 54, 9 from 51.5 in August. . The USD capitalized on this ratio and made it difficult for gold to come back.

On Friday, the BLS reported that non-farm payrolls (NFP) rose by 254,000 in September, beating market expectations of 140,000 by a wide margin. Additionally, August’s NFP gain of 142,000 was revised up to 159,000. Other details of the employment report showed that the unemployment rate fell to 4.1 percent, while annual wage inflation, as measured by the change in average hourly earnings, rose to 4 percent from 3.9 percent in August . Gold failed to recover after upbeat US labor market data.

Gold investors remain focused on geopolitics and await US inflation data

The US economic calendar will not provide high-level macroeconomic data in the first half of next week. On Wednesday, the Fed will release the minutes of its September policy meeting.

Investors will be closely scrutinizing discussions surrounding the decision to cut the policy rate by 50 basis points (bps). If the publication reveals that policy makers preferred a big interest rate cut as the first step towards gradual policy easing, rather than in response to growing signs of cooling labor market conditions, the immediate reaction could boost USD. CME Group’s FedWatch tool shows markets are still pricing in a more than 30% chance the Fed will opt for an additional 50bps rate cut at its next policy meeting in November, suggesting the USD has more room to the upside if investors lean . to a discount of 25 bps.

On the other hand, the USD could be under pressure and allow gold to head north if the minutes reflect that policymakers will keep an open mind to further big rate cuts if data points to a recession economic or a worsening labor market outlook.

On Thursday, the BLS will release consumer price index (CPI) data for September. The monthly reading of the core CPI, which excludes prices of volatile items and is not distorted by the base effect, could trigger a reaction in gold. Markets expect core CPI to rise 0.2% in September, following August’s 0.3% rise. A value of 0.2% or less could weigh on the USD. While a rise of 0.5% or more could cause investors to doubt the disinflation process and lift the USD, causing XAU/USD to head south.

Market participants will also pay particular attention to titles coming from the Middle East. If the crisis deepens, with Israel retaliating against Iran and Iran not backing down, Gold could continue to take advantage of safe-haven demand.

Gold technical outlook

The Relative Strength Index (RSI) indicator on the daily chart retreated slightly below 70, reflecting sellers’ reluctance to bet on a prolonged decline. On the downside, the midpoint of the ascending retracement channel coming from late June forms the first support at $2,640. If this level fails, the next support could be seen at $2,605 – $2,600 (20-day Simple Moving Average (SMA), static level) before $2,575 (lower limit of ascending channel).

Looking north, intermediate resistance appears to have formed at $2,675 (static level) before $2,700-$2,705 (round level, upper limit of ascending channel).

Frequently asked questions about sense of risk

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 bear during the reference period. In a “risky” market, investors are optimistic about the future and more willing to buy risky assets. In a “de-risking” market, investors begin to “play it safe” because they are worried about the future and therefore buy less risky assets that are more certain to yield a return, even if it is relatively modest .

Typically during “risk on” periods, stock markets will rise, most commodities – except gold – will also gain in value as they benefit from a positive growth outlook. The currencies of nations that are large commodity exporters are strengthening due to increased demand and Cryptocurrencies are rising. In a “risk-off” market, Bonds rise – 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), Canadian dollar (CAD), New Zealand dollar (NZD) and minor currencies such as the ruble (RUB) and South African rand (ZAR) all tend to rise in markets that are “risk-on” .This is because the economies of these currencies depend heavily on commodity exports for growth, and commodities tend to rise in price during risky periods.This is because investors anticipate higher demand for commodities in the future the cause of intensified economic activity.

The main currencies that tend to rise during “risk-off” periods 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 world’s largest economy is unlikely to default. The yen, due to increased demand for Japanese government bonds, as a large proportion are held by domestic investors, who are unlikely to withdraw them – even in a crisis. Swiss franc, as strict Swiss banking laws provide investors with increased capital protection.

VaselineOctober 4, 2024

0 5 minutes read