Gold leaps amid the quiet language of Fedspeak

• Gold rebounds after the Reserve Bank of New Zealand implements a very large interest rate cut, continuing the global trend.
• Neutral or dovish Fedspeak from a string of Fed officials further supports the precious metal.
• Technically, XAU/USD is entering a near-term downtrend, influencing the price action towards further losses.

Gold (XAU/USD) is trading at $2,610 on Thursday, having bounced back from the psychological $2,600 level as the yellow metal gets a boost from the overall decline in global interest rates and a string of Federal Reserve officials (Fed) hit a neutral. or the dovish tone to their commitments.

Gold gets a boost from the RBNZ’s big rate cut

Gold bounced back overnight after the Reserve Bank of New Zealand (RBNZ) became the latest major central bank to cut interest rates. The RBNZ implemented a 50 basis point (bps) cut in its official cash rate to 4.75% from 5.25% previously at its October meeting. Lower interest rates are bullish for gold because they lower the opportunity cost of holding a non-interest-paying asset.

The RBNZ move helps rescue gold from a poor start to the week which has seen it lose almost 1.50% so far, mainly on the back of a better outlook for the US economy. That, in turn, sharply reduced bets that the Federal Reserve (Fed) will implement another 50 bps rate cut of its own at its next meeting in November.

The market-based probability that the Fed will cut by 50 bps (0.50%) has now dropped to zero, according to CME’s Fedwatch tool. Meanwhile, the odds of a cut of less than 25 bps are around 85%. What’s more – from a tapering of some magnitude being inevitable – the probability that the Fed will do nothing in November has now risen to around 15%.

Gold is also buoyed by a string of speeches from Fed policymakers on Wednesday. These were all rated either in neutral or dovish territory on FXStreet FedTracker – meaning in favor of loose policy and low interest rates – and were all below average for the speaker (see calendar). FXStreet FedTracker is a new AI-powered tool that rates the tone of Fed officials’ speeches on a scale of 0 to 10.

Federal Reserve Bank of San Francisco President Mary Daly (voting member) scored the lowest, with a FedTracker score of 2.0, well below her average of 3.6. Daly said one or two more rate cuts were needed before the end of the year, adding that “I was more concerned about the labor market” than “accelerating inflation”.

The Fed’s decision-making at its November meeting could be further influenced by Thursday’s release of US inflation data, which in turn could impact gold. The consumer price index (CPI) for September is expected to rise 2.3% from 2.5% year-on-year and the core CPI to rise 3.2% from the month August, unchanged from August. If it is lower, the bets can increase again for a reduction in the rate; the opposite is true if inflation remains sticky.

Gold backed by safe haven demand

Gold could be supported, however, as it continues to attract safe-haven flows amid heightened geopolitical tensions. Israel continues its attacks on targets in Lebanon, and markets remain in turmoil anticipating a retaliatory Israeli attack on Iran after last week’s ballistic missile launch.

As for the latest developments, the White House confirmed that Israeli Prime Minister Benjamin Netanyahu spoke with US President Joe Biden on Wednesday, but there was no mention of potential Israeli retaliation against Iran. The Biden administration is pressing Israel to limit its retaliation to military targets, according to Bloomberg News, and Axios News reported that Netanyahu will convene Israel’s security cabinet today.

Technical analysis: Gold in short-term downtrend

Gold continues its near-term downtrend, hitting support just above the psychological $2,600 level and then rebounding.

XAU/USD 4 Hour Chart

The short-term trend turned bearish from previously sideways after gold broke out of its narrow range and decisively breached its long-term trend line on Tuesday. Given the principle of technical analysis that “the trend is your friend”, the odds favor a continuation lower in the short term.

A break below support at $2,600 (high since August 18, round number) would likely indicate further weakness to the next downside target at $2,578, where the green 200-period simple moving average (SMA) on the 4 hours above is likely to provide a safety net.

However, bears should proceed with caution as the medium and long-term trends remain bullish. If at any time one of these longer up cycles resumes, Gold could stall, reverse and start a new leg up.