Gold (XAU/USD) remained under bearish pressure and touched its weakest level since early October, below $4,000, pressured by the Federal Reserve (Fed) Chairman Jerome Powell’s cautious remarks on policy easing and a de-escalation in the United States (US) – China trade conflict. Upcoming macroeconomic data releases from the US and comments from Fed officials could influence Gold’s valuation in the near term.
Gold extends correction from record-high
Gold started the week under heavy bearish pressure and lost more than 3% on Monday. Growing optimism about the US and China reaching a trade truce allowed risk flows to dominate markets, making it difficult for Gold to find demand as a safe haven. Following a high-level meeting with Chinese officials, US Treasury Secretary Scott Bessent said over the weekend that China was ready to make a trade deal to avert a new 100% tariff on Chinese imports, and added that a framework was prepared for the meeting between US President Donald Trump and Chinese President Xi Jinping.
As Trump signed framework trade agreements with multiple nations, including South Korea, during his Asia tour, Gold remained on the back foot and fell to its lowest level since early October, below $3,900, on Tuesday.
Following a recovery attempt in the first half of the day on Wednesday, Gold turned south in the American session and closed the fourth consecutive day in negative territory.
The Fed decided to cut the policy rate by 25 basis points (bps) to the range of 3.75%-4% following the October policy meeting, as anticipated. The US central bank also announced that it will conclude the aggregate balance sheet drawdown on December 1. While responding to questions in the post-meeting press conference, Fed Chair Jerome Powell noted that another rate cut in December is “far from assured” and explained that the outlook for employment and inflation has not changed much since the September meeting. Powell further reiterated that the central bank needs to manage the risk of more persistent inflation. The benchmark 10-year US Treasury bond yield climbed above 4% following Powell’s cautious remarks on policy easing, and the US Dollar (USD) gathered strength, weighing on XAU/USD.
On Thursday, the negative shift seen in the risk sentiment helped Gold stage a rebound. After recovering above $4,000, the precious metal went into a consolidation phase on Friday.
Gold investors await US data, Fed commentary
The US economic calendar will feature several macroeconomic data releases that could provide valuable insights into the labor market conditions and the overall economic situation, given the postponed or cancelled releases due to the ongoing government shutdown.
On Monday, the Institute for Supply Management (ISM) will publish the Manufacturing Purchasing Managers’ Index (PMI) data for October. A significant improvement in the headline PMI, and/or the Employment component of the survey, could support the USD with the immediate reaction and cause XAU/USD to stretch lower.
On Wednesday, Automatic Data Processing (ADP) will release the private sector payroll data for October. Earlier in the week, the ADP reported on Tuesday that private payrolls increased by an average of 14,250 jobs in the four weeks ending October 11, and announced that it will start publishing a weekly preliminary estimate, which will present a four-week moving average of the total employment change in the private sector. Hence, the market reaction to the upcoming ADP data could remain short-lived. Later in the day, the ISM Services PMI data for October could trigger a straightforward reaction, with the better-than-forecast headline PMI reading and a noticeable recovery in the Employment component boosting the USD while weighing on XAU/USD and vice versa.
Investors will also pay close attention to comments from Fed officials. According to the CME FedWatch Tool, the probability of one more Fed rate cut in December declined below 70% on Friday from 90% ahead of the Fed meeting.
In case policymakers echo Powell’s tone by refraining from committing to another interest rate reduction before the end of the year, the USD could continue to gather strength alongside rising T-bond yields, opening the door for another leg lower in Gold. Conversely, XAU/USD could hold its ground if Fed officials hint that they are on track to ease the policy rate further unless they see a convincing sign of tariffs lifting inflation.
Gold technical analysis
The Relative Strength Index (RSI) indicator on the daily chart stays near 50 and Gold continues to trade below the 20-day Simple Moving Average (SMA), while holding in the upper half of an ascending regression channel coming from the beginning of the year.
On the downside, $3,970 (Fibonacci 38.2% retracement of the August-October rally) aligns as an interim support level before $3,900 (mid-point of the ascending channel, round level) and $3,850-$3,820 (Fibonacci 50% retracement, 50-day SMA).
In case Gold rises above $4,090 (20-day SMA) and stabilizes there, $4,130 (Fibonacci 23.6% retracement) could be seen as the next resistance level before $4,200 (round level).
Fed FAQs
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.
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.
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.
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.
