Gold (XAU/USD) continued to ignore overbought conditions this week and extended its rally to a new record-high above $4,000. Key inflation data from the United States (US) could be postponed next week unless the government reopens, allowing risk perception and comments from Federal Reserve (Fed) officials to continue driving XAU/USD’s performance in the short term.
Gold shines as the preferred safe-haven asset
Gold benefited from several developments in the first half of the week and notched a new record-high near $4,060 on Wednesday.
Sanae Takaichi, who is known to be a fiscal dove that could oppose further monetary tightening by the Bank of Japan (BoJ), won the leadership race of Japan’s ruling Liberal Democratic Party (LDP) over the weekend. Growing market expectations for pro-stimulus policies triggered a selloff in the Japanese Yen (JPY). The XAU/JPY pair opened with a huge bullish gap on Monday and gained nearly 8% in a three-day rally, showing a strong capital outflow out of the JPY into Gold.
Moreover, France’s newly appointed Prime Minister Sébastien Lecornu announced his resignation on Monday, reviving fears over a deepening political crisis in Europe’s second-biggest economy. In turn, capital fleeing the Euro moved to Gold, with the XAU/EUR pair rising nearly 5% in the first half of the week.
Meanwhile, lawmakers in the United States (US) failed to agree on a funding bill to end the government shutdown, causing postponements in data releases and feeding into the uncertainty surrounding the economic outlook, which in turn clouded the visions of Fed policymakers. Although the US Dollar (USD) Index, which gauges the USD’s performance against a basket of six major currencies, gathered bullish momentum throughout the week, it had little to no impact on the XAU/USD’s rally.
On Thursday, easing geopolitical tensions limited Gold’s strength after US President Donald Trump announced that Israel and Hamas had agreed on a peace plan and that Israeli hostages could be released by next Monday. XAU/USD lost more than 1.5% and closed below $4,000 on Thursday before going into a consolidation phase on Friday.
Gold investors will assess political developments and Fed speeches
The US Bureau of Labor Statistics (BLS) is scheduled to release the Consumer Price Index (CPI) and the Producer Price Index (PPI) data for September on Wednesday and Thursday, respectively, although it remains uncertain whether the data will be released.
Democrats and Republicans failed to make any progress in reopening the government after the funding bill was rejected with a 54-45 vote on Thursday. The Senate will return next Tuesday and there won’t be any other votes on the bill until then. Meanwhile, The New York Times reported early Friday that the BLS is calling back a limited number of staff from furlough to complete the September Consumer Price Index (CPI) report.
“The decision reflects the importance of September inflation data in determining the annual Social Security cost-of-living adjustment (COLA), which is calculated using third-quarter CPI figures. A prolonged delay would risk postponing the COLA announcement that affects millions of retirees,” the report explained. Still, it’s unclear whether the data will be made public. In case it’s published, the market reaction is likely to be focused on the monthly core CPI figure, which is forecast to rise by 0.3%. A reading below market expectations could hurt the USD and allow XAU/USD to continue to stretch higher. Conversely, investors could reassess the probability of a 25-basis-point (bps) rate cut in December and cause Gold to turn south if the data surprises to the upside. According to the CME FedWatch Tool, markets are currently fully pricing in a 25 bps reduction in the policy rate in October and see about an 80% probability of one more 25 bps cut in December.
Comments from Fed officials will also be watched closely by market participants, especially if the shutdown continues. If Fed officials hint that they will need to adopt a cautious approach to further policy easing, citing a lack of data and the heightened uncertainty, Gold could have a hard time gathering bullish momentum. On the other hand, the USD could come under renewed selling pressure and allow XAU/USD to hold its ground if Fed officials suggest that policy easing could be the preferred route in the case of a prolonged government shutdown and its potential negative impact on employment and consumer spending.
Gold technical analysis
Gold remains technically overbought in the near term, with the Relative Strength Index (RSI) indicator on the daily chart holding well above 70 despite declining sharply from near 90 on Thursday. Additionally, XAU/USD continues to hold above the upper limit of the 10-month-old ascending regression channel, currently located at $3,970, after closing the last four days above this level.
Looking south, the first support level can be spotted at $3,900 (round level, static level) before $3,820 (20-day Simple Moving Average) and $3,750 (mid-point of the ascending regression channel). On the upside, an interim resistance level seems to have formed at $4,060 (static level) ahead of $4,100 (round level) and $4,200 (round level).
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.
