Gold price (XAU/USD) recovers to near $4,150 during the early European trading hours on Wednesday. The precious metal drifts higher amid concerns over the impact of the US government shutdown and ongoing fears about unsustainable government debt globally.
The growing expectation that the US Federal Reserve (Fed) will deliver another quarter-point rate cut in the October policy meeting could lift the Gold price. Lower interest rates could reduce the opportunity cost of holding Gold, supporting the non-yielding precious metal.
On the other hand, the United States (US)-China trade tensions appear to have eased as both sides are slated to work out a deal ahead of the November 1 tariff deadline. This, in turn, could undermine the safe-haven demand.
Looking ahead, traders will closely monitor the US September Consumer Price Index (CPI) inflation data later on Friday due to the government shutdown-driven data drought.
Both headline and core CPI are expected to show a rise of 3.1% YoY in September. Any signs of a hotter-than-expected US inflation could lift the US Dollar (USD) and weigh one the USD-denominated commodity price in the near term.
Daily Digest Market Movers: Gold gains ground as US Dollar weakens
- The US government shutdown has entered its fourth week as the Senate on Monday failed for the 11th time to advance a House-passed measure to fund the government and end the ongoing shutdown. The 50-43 vote fell mostly along party lines.
- US President Donald Trump last week threatened a new 100% tariff on China. He softens his stance over the weekend, saying that high tariffs on China are unsustainable and expressing willingness for smoother relations with China.
- Trump late Tuesday predicted an upcoming meeting with his Chinese President Xi Jinping would yield a “good deal” on trade. However, he also conceded that the highly anticipated talks may not happen.
- US Treasury Secretary Scott Bessent is set to meet with his Chinese counterparts to discuss a de-escalation of trade tensions ahead of the U.S.-China trade talks.
- Trump said late Tuesday that he did not want a “wasted meeting” after a plan to have face-to-face talks with his Russian counterpart, Vladimir Putin, about the war in Ukraine was put on hold, per the BBC.
- Traders are currently pricing in nearly a 99% possibility that the US central bank will cut interest rates again next week, followed by another reduction in December, according to the CME FedWatch tool.
Gold retains a positive tone in the longer term
Gold price trades in positive territory on the day. According to the daily timeframe, the constructive outlook of the precious metal remains intact, characterized by the price holding above the key 100-day Exponential Moving Average. However, further consolidation or temporary sell-off cannot be ruled out as the 14-day Relative Strength Index (RSI) is pointing to the midline, indicating the neutral momentum in the near term.
On the bright side, the first upside barrier to watch is $4,140, the high of October 15. Any follow-through buying above this level could pave the way to $4,330, the high of 16. Further north, the next hurdle is seen in the $4,370-$4,380 zone, representing the all-time high and the upper boundary of the Bollinger Band.
In the bearish case, the 4,000 psychological level acts as a key support level for XAU/USD. The additional downside filter emerges at $3,947, the low of October 10. The next contention level is located at $3,838, the low of October 3.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.