Gold (XAU/USD) remains ahead during the first half of the European session on Monday and is currently trading near its highest level since October 21. Traders have increased their bets on another interest rate cut by the US central bank in reaction to recent dovish statements made by several Federal Reserve officials. On the other hand, cautious expectations are pulling the US dollar to its lowest level in nearly two weeks and continue to support the non-yielding yellow metal.
Apart from this, cautious market mood and geopolitical risks stemming from the escalating Russian-Ukrainian war turned out to be other factors benefiting the safe-haven gold price. However, the rally lacks follow-through as XAU/USD bulls appear hesitant and opt to wait for major economic releases in the US this week, starting with the ISM Manufacturing PMI later today. This in turn requires some caution before entering into any further upward move during the day.
Daily Summary Market Drivers: Gold bulls maintain control as Fed rate cut bets continue to weigh on the US dollar
- The recent cautious statements made by US Federal Reserve Governor Christopher Waller and New York Fed President John Williams strengthened the argument in favor of another interest rate cut this month. Furthermore, the mixed set of US economic data released last week did little to impact market expectations and continues to support non-yielding gold.
- White House economic adviser Kevin Hassett said on Sunday that he would be happy to serve as the next head of the US central bank if President Donald Trump chooses him. Hassett is expected to implement Trump’s calls for a sharp cut in interest rates, pushing the precious metal to a six-week high during the Asian session on Monday.
- Dovish Fed outlook continues to exert downward pressure on the US dollar, which falls to its lowest level in nearly two weeks and turns out to be another factor acting as a tailwind for the precious metal. Aside from this, there is an overall softer tone in Asian stock markets, providing additional support for the safe-haven commodity.
- A special survey released on Monday showed that business activity in China’s manufacturing sector unexpectedly fell into contraction territory. This follows the release of the official PMI on Sunday, which contracted for the eighth straight month, weighing on investor sentiment amid continued geopolitical uncertainty.
- Meanwhile, Ukrainian Navy drones bombed two oil tankers belonging to Russia’s so-called Shadow Fleet as they traveled through the Black Sea. Furthermore, US Secretary of State Marco Rubio said that recent talks with Ukrainian officials have been very productive, although he noted that there is still more work to be done to end the war.
- Traders are now looking to the US ISM Manufacturing PMI release for some momentum later during the North American session. Aside from this, important US economic releases this week, scheduled to take place at the start of a new month, will drive demand for the US dollar and influence the near-term trajectory of the XAU/USD pair.
Gold bulls may now aim to reclaim $4,300 amid constructive technical setup
From a technical perspective, continued strength and acceptance above the $4,250 area will be seen as a fresh impetus for the bulls and pave the way for further near-term upward movement for the gold price. Given that the oscillators on the daily chart are gaining positive momentum, the commodity may then cross an intermediate barrier near the $4277-4278 area and aim to reclaim the $4300 mark.
On the flip side, the Asian session low, around the $4,200 area, now appears to be protecting the immediate downside. Any further weakness can be viewed as a buying opportunity and find decent support near the $4155-4153 area. A convincing breakout below could trigger some technical selling and leave the gold price vulnerable to accelerating the decline towards the $4,100 mark on its way to the $4,073 confluence area. The latter consists of the 200-period Exponential Moving Average (EMA) on the 4-hour chart and an uptrend line extending from late October.
Frequently asked questions about risk sentiment
In the world of financial terminology, the two widely used terms “risk appetite” and “risk aversion” refer to the level of risk that investors are willing to take over the indicated period. In a “risk on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk off” market, investors begin to “play safe” because they are concerned about the future, and thus buy assets that are less risky and more guaranteed to generate a return, even if it is relatively modest.
Typically, during periods of “risk on”, stock markets rise, and most commodities – with the exception of gold – will also rise in value because they benefit from positive growth expectations. The currencies of countries exporting heavy goods are strengthening due to increased demand, and cryptocurrencies are rising. In a “risk off” market, bonds – especially major government bonds – rise, gold shines, and safe-haven currencies like the Japanese yen, Swiss franc and US dollar all benefit.
The Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD) and minor foreign currencies such as the Ruble (RUB) and South African Rand (ZAR) tend to appreciate in ‘risk’ markets. This is because the economies of these currencies rely heavily on commodity exports for growth, and commodities tend to rise in price during periods of risk. This is because investors expect increased demand for raw materials in the future due to increased economic activity.
The major 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 crises investors buy US government debt, which is considered safe because the world’s largest economy is unlikely to default. The reason for the yen is the increased demand for Japanese government bonds, because a high percentage of them are held by domestic investors who are unlikely to get rid of them – even in a crisis. The Swiss franc, because strict Swiss banking laws provide investors with enhanced capital protection.
