Gold remains pinned near multi-month low, bearish potential seems intact

Gold price consolidates its recent heavy losses a near seven-month trough touched on Tuesday.
Hawkish Fed expectations, elevated US bond yields and a bullish USD should act as a headwind.
Investors look to the US ADP report and ISM Services PMI for short-term trading opportunities.

Gold price (XAU/USD) extends its consolidative price move through the first half of the European session on Wednesday and remains confined in a narrow trading band just above a near seven-month low touched the previous day. The lack of any buying interest, meanwhile, suggests that the recent downfall witnessed over the past two weeks or so is still far from being over. The Federal Reserve's (Fed) hawkish outlook remains supportive of elevated US Treasury bond yields and the underlying bullish sentiment surrounding the US Dollar (USD), validating the negative outlook for the non-yielding yellow metal.

Market participants seem convinced that the Fed will continue to tighten its monetary policy. Moreover, the recent comments by several Fed officials backed the case for at least one more 25 bps rate hike by the end of this year to bring inflation back to the 2% target. Adding to this, the Job Openings and Labor Turnover Survey, or JOLTS report, on Tuesday, showing that job openings in the United States (US) unexpectedly rose in August amid a surge in demand for workers and pointed to a still-tight labour market. This comes on top of a rise in consumer spending and brings wage inflation back on the agenda.

This should allow the Fed to keep rates higher for longer and possibly extend the rate-hiking cycle into 2024, which leads to an extended selloff in the US fixed-income market. Meanwhile, the spillover effect, along with looming recession fears and worries about China's ailing property sector, continues to take its toll on the global risk sentiment. This, in turn, benefits the traditional safe-haven Gold price and holds back bearish traders from placing fresh bets amid oversold conditions on the daily chart. Investors now look to the US ADP report and ISM Services PMI for short-term opportunities later this Wednesday.

Daily Digest Market Movers: Gold price remains on the defensive near multi-month low

Gold price continues with its struggle to register any meaningful recovery and languishes near a multi-month low in the wake of bets for further policy tightening by the Federal Reserve.
The recent comments by several Fed officials also backed the case for at least one more 25 basis points (bps) lift-off by the end of this year to bring inflation back to the 2% target.
The monthly JOLTS report showed that there were an estimated 9.61 million open jobs in August, marking a sizeable uptick from the previous month's upwardly revised print of 8.92 million openings.
This, along with persistently high inflationary pressures, might compel the Fed to stick to its hawkish stance and raise interest rates at its next monetary policy meeting in November.
The benchmark 10-year US Treasury yield climbs to a fresh high since 2007, while the US Dollar stands tall near an 11-month high, capping the upside for the non-yielding metal.
Republican Kevin McCarthy, who navigated legislation to keep the government running until November 17, becomes the first US House speaker to be removed from his job.
The development exposes GOP infighting and sparks chaos ahead of the 2024 election, which, along with looming recession risks, continues to weigh on investors' sentiment.
The risk-off environment, which tends to benefit traditional safe-haven assets, might hold back traders from placing fresh bearish bets around the XAU/USD.
Traders now look to the ADP report, expected to show that the US private-sector employers added 153K jobs in September as compared to the 177K in the previous month.
The US economic docket also features the ISM Service PMI, which is anticipated to ease from 54.5 to 53.6 in September and should provide some impetus to the XAU/USD.

Technical Analysis: Gold price consolidates in a range before the next leg down

The Relative Strength Index (RSI) on the daily chart is flashing extremely oversold conditions and makes it prudent to wait for some near-term consolidation or a modest bounce before positioning for a further depreciating move. The lack of firm buying interest, meanwhile, validates the near-term negative outlook for the XAU/USD. Hence, some follow-through weakness below the $1,815 level, or a multi-month low set on Tuesday, towards challenging the $1,800 round figure, looks like a distinct possibility.

A convincing break below the latter will expose the next relevant support near the $1,770-1,760 region. On the flip side, any recovery attempt might confront stiff resistance and remain capped near the $1,830-1,832 horizontal zone. A sustained strength beyond, however, might trigger a short-covering rally and lift the yellow metal to the $1,850 hurdle en route to the $1,858-1,860 strong barrier.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

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