Gold struggles to capitalize on modest intraday rebound amid Fed's hawkish tilt

Daily Digest Market Movers: Gold lacks bullish conviction as hawkish Fed offsets reviving safe-haven demand

Federal Reserve Chair Jerome Powell's comments last week tempered expectations for another interest rate cut in December and pushed the US Dollar to a fresh high since early August during the Asian session on Tuesday. In fact, Powell said that a further reduction in the policy rate at the December meeting is not a foregone conclusion.
Traders were quick to react and are now pricing in a roughly 65% chance of a rate cut at the December 9-10 FOMC policy meeting, which continues to drive flows towards the USD and prompts fresh selling around the non-yielding Gold. However, economic risks stemming from a prolonged US government shutdown could cap the USD.
The government shutdown is on the verge of becoming the longest in US history on Tuesday night amid Congressional deadlock. Democrats have refused to support a Republican-backed package to reopen the government as the upper chamber prepares to vote on the House-passed funding bill for the 14th time later this Tuesday.
GOP Senator John Kennedy said he doesn’t expect his colleagues to eliminate the filibuster to reopen the government without winning over the support of Democrats, despite the President’s plea to throw out the 60-vote threshold. Senate Majority Leader John Thune said that he is optimistic about ending the government shutdown this week.
Nevertheless, investors now seem worried that a prolonged government closure could cause economic damage, which, in turn, could limit the upside for the USD. Apart from this, persistent geopolitical uncertainties could offer some support to the safe-haven commodity and warrant some caution before positioning for any further losses.
In the absence of any relevant market-moving economic releases from the US, traders will scrutinize comments from FOMC members for cues about the future rate-cut path and short-term impetus. Apart from this, the broader risk sentiment might contribute to producing short-term trading opportunities around the XAU/USD pair.

Gold seems vulnerable; 200-hour SMA hurdle holds the key for bullish traders

The overnight failure near the 200-hour Simple Moving Average (SMA) and the subsequent fall back built the case for a further depreciating move for the commodity. However, neutral oscillators on the daily chart make it prudent to wait for some follow-through selling below the previous day's swing low, around the $3,963-3,952 region, before positioning for deeper losses. The XAU/USD pair might then accelerate the slide towards the $3,940 intermediate support en route to the $3,910-3,900 region and last week's swing low, around the $3,886 zone.

On the flip side, momentum back above the $4,000 mark might continue to face stiff resistance near the $4,025 region (200-hour SMA). This is followed by the $4,045-4,046 supply zone, which, if cleared decisively, could trigger a short-covering rally and allow the Gold price to reclaim the $4,100 round figure with some intermediate resistance near the $4,075 area.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.