- Gold price holds up as US Retail Sales data came in higher than expected.
- Fed policymakers see interest rates as sufficiently restrictive due to higher US Treasury yields.
- US Retail Sales grew 0.7% in September on month, topping the 0.3% increase expected.
Gold price (XAU/USD) extends upside ahead of US President Joe Biden’s visit to Israel amid deepening Middle-East tensions and the speech from Federal Reserve (Fed) Chair Jerome Powell, which is expected to provide significant guidance on interest rates. Investors hope that Powell will favor a neutral monetary policy and join other Fed officials who recently said higher bond yields are sufficient to tame inflation.
The precious metal remains upbeat even as the United States Census Bureau reported a better-than-anticipated Retail Sales report for September. Retail Sales increased 0.7% in September compared with the previous month, against expectations of a 0.3% increase, although growth remained below the 0.8% recorded in August. The increase in Retail Sales was partly driven by higher gasoline prices (Retail Sales data aren’t adjusted for inflation and thus reflect price changes). Retail Sales excluding automobiles were up 0.6% against estimates of 0.2% but failed to match the former release of 0.9%. Strong Retail sales data, one key gauge of consumer spending, suggests strength in the broader US economy. The US Dollar Index recovered strongly to near 106.50.
Daily Digest Market Movers: Gold price capitalizes on conflicts at Gaza
- Gold price rebounds from around $1,920.00 as investors await the speech from Federal Reserve Chair Jerome Powell, which is scheduled for Thursday.
- The speech from Powell will provide meaningful cues about the upcoming interest rate decision, set for November 1.
- Investors will watch whether Powell joins other Fed officials and supports keeping interest rates unchanged for the second time in a row due to rising US Treasury yields.
- The 10-year US Treasury yields are hovering near multi-year highs at 4.75% and Fed policymakers are of the view that higher yields are sufficient to ease overall spending and investment.
- San Francisco Fed President Mary Daly suggested that the recent surge in long-term bond yields is equivalent to one 25 basis points rate hike. The risk of lifting interest rates further could push the economy into a recession.
- Philadelphia Fed Bank President Patrick Harker said Monday that the central bank should not build new pressures on the economy by increasing borrowing costs further. Harker reiterated that the Fed is done hiking interest rates in an environment where inflationary pressures are ebbing.
- Harker pointed out that the economy is resilient due to a stabilizing labor market and easing inflation, but warned that first-time homebuyers have vanished from the market due to higher interest rates.
- As per the CME Group Fedwatch tool, traders see a 90% chance of the Fed keeping interest rates unchanged at 5.25%-5.50%. The odds of one more interest rate increase in any of the two remaining monetary policy meetings in 2023 are unchanged at 30%.
- Apart from the Fed policy, US President Joe Biden’s visit to Israel amid the deepening conflict in the region is likely to keep the market on edge. Further escalation in the Israel-Hamas war would improve the appeal for Gold.
- US Secretary of State Antony Blinken confirmed that President Biden will visit Israel on Wednesday, emphasizing the need to save civilians. Meanwhile, Israel is preparing for the ground offensive in Gaza against Hamas.
- The US Dollar index (DXY) finds buying interest near 106.20. A sideways move is anticipated ahead of the Retail Sales data for September. Analysts at SocGen expect a mild 0.3% MoM increase for Retail Sales for the aggregate but note that higher gasoline prices are partially responsible for the gain.
- Higher-than-expected consumer spending figures could lift chances of more interest rate increases from the Fed.
Technical Analysis: Gold price climbs to near $1,930
Gold price trades sideways near $1,920.00 ahead of multiple events. The precious metal has turned directionless after a sharp upside move to near an almost four-week high at $1,932.00. The yellow metal has climbed above all short-term Exponential Moving Averages (EMAs), indicating that the overall trend is bullish. Momentum oscillators have also shifted into the bullish range, which suggests an increasing likelihood of an upward price move.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” 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 crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.