Gold price remains on the defensive amid bets for smaller Fed interest rate cut

• Gold price remains on the defensive amid reduced bets for a 50 bps Fed rate cut in November.
• The USD consolidates last week’s strong gains and also contributes to capping the XAU/USD. 
• Geopolitical risks might continue to act as a tailwind and limit losses for the precious metal. 

Gold price (XAU/USD) continues with its struggle to gain any meaningful traction and remains confined in a familiar range held over the past week or so amid mixed fundamental cues. Investors further scaled back their expectations for a more aggressive policy easing by the Federal Reserve (Fed) following the release of a blowout US jobs data on Friday. This assists the US Dollar (USD) in preserving its recent strong gains to a seven-week top and acts as a headwind for the non-yielding Gold price. 

Meanwhile, easing worries about an economic slowdown in the US, along with the optimism over China's stimulus measures, remain supportive of the upbeat market mood. This further contributes to capping the upside for the Gold price. That said, the risk of a further escalation of geopolitical tensions in the Middle East should act as a tailwind for the safe-haven precious metal and help limit any meaningful downfall in the absence of any relevant market-moving US macro data on Monday.

Daily Digest Market Movers: Gold price bulls remain on the sidelines amid mixed fundamental cues

• Friday's blowout US employment details temper market expectations for a more aggressive policy easing by the Federal Reserve and continue to undermine demand for the non-yielding Gold price. 
• The US Labor Department reported that the economy added 254K jobs in September, beating estimates by a big margin, and the Unemployment Rate unexpectedly dipped to 4.1% from 4.2%.
• Additional details showed that there were 72K more jobs added in July and August than previously reported, pointing to a still resilient labor market and that the economy is in a much better shape. 
• According to the CME Group's FedWatch Tool, traders now see a nearly 95% chance that the Fed will lower borrowing costs by 25 basis points at the end of the November policy meeting. 
• The yield on the benchmark 10-year US government bond remains close to the 4.0% threshold, while the US Dollar stands tall near a seven-week high and keeps the XAU/USD bulls on the defensive. 
• The upbeat US NFP report eased concerns about an economic slowdown, which, along with the optimism over China's stimulus, remains supportive of the upbeat mood around the equity markets. 
• Israel carried out intense bombardment in Gaza’s Jabalia refugee camp and launched a new round of airstrikes in Lebanon. In retaliation, Hezbollah attacked Israel's Haifa on Monday morning.
• The developments raise the risk of a full-blown war in the Middle East and might continue to benefit the commodity's safe-haven status, warranting some caution for bearish traders. 
• Official data published earlier this Monday showed that China's Gold reserves remained unchanged for the fifth straight month and sat at 72.8 million fine troy ounces at the end of September.

Technical Outlook: Gold price extends its consolidative price move before the next leg up

From a technical perspective, the range-bound price action might still be categorized as a bullish consolidation phase against the backdrop of the recent strong runup to the record peak. Moreover, oscillators on the daily chart are holding comfortably in positive territory and have also eased from the overbought zone. This, in turn, suggests that the path of least resistance for the Gold price remains to the upside and supports prospects for an eventual break to the upside. That said, it will still be prudent to wait for some follow-through buying above the $2,670-$2,672 hurdle before placing fresh bullish bets. This is followed by the $2,685-2,686 zone, or the all-time high, and the $2,700 mark, which if cleared will set the stage for an extension of a well-established multi-month-old uptrend.

On the flip side, the lower end of the aforementioned trading range, around the $2,630 area, might continue to offer immediate support to the Gold price and act as a key pivotal point for short-term traders. A convincing break below might prompt some technical selling and drag the XAU/USD below the $2,600 mark, towards the next relevant support near the $2,560 zone. The corrective decline could extend further towards the next relevant support near the $2,535-2,530 region en route to the $2,500 psychological mark.

Interest rates FAQs

What are interest rates?

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.

How do interest rates impact currencies?

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.

How do interest rates influence the price of Gold?

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.

What is the Fed Funds rate?

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.

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