Gold Price Edges Lower as Stronger US Dollar Weighs on Gains
Gold price (XAU/USD) experienced a slight dip during the early European session on Wednesday, erasing a portion of the strong gains made the previous day. These gains were fueled by escalating geopolitical tensions in the Middle East, particularly after Iran fired ballistic missiles at Israel. Despite this, the stronger US Dollar (USD) and reduced expectations for aggressive Federal Reserve rate cuts have limited the upside for gold. As the market awaits key US employment data later this week, traders remain cautious.
Middle East Tensions Boost Safe-Haven Demand for Gold
Geopolitical risks in the Middle East continue to influence market sentiment, providing some support for gold as a safe-haven asset. On Tuesday, Iran launched a barrage of ballistic missiles at Israel in retaliation for Israeli military actions in Lebanon against Hezbollah, a group backed by Iran. This event heightened fears of a broader conflict in the region, leading to increased demand for gold.
Israeli Prime Minister Benjamin Netanyahu vowed that Iran would face consequences for its actions, while Iran warned that any retaliation would lead to widespread destruction. As tensions rise, investors are seeking refuge in gold, which historically performs well during periods of geopolitical uncertainty.
US Dollar Strength Caps Gold’s Upside
While geopolitical risks have bolstered gold, the stronger US Dollar has limited its potential for further gains. Over the past two days, the USD has maintained its recovery, supported by signs of resilience in the US labor market. The Job Openings and Labor Turnover Survey (JOLTS) released by the US Bureau of Labor Statistics showed an unexpected increase in job openings in August, with the total standing at 8.04 million.
This labor market data, combined with the Institute for Supply Management’s (ISM) report showing a stagnant Manufacturing PMI for September, has contributed to the USD’s strength. Despite a contraction in US manufacturing activity for the sixth consecutive month, the labor market’s robustness has kept the dollar strong, limiting gold’s upward momentum.
XAU/USD Daily Price Chart
Source: TradingView, prepared by Richard Miles
Federal Reserve Rate Expectations Influence Gold Price Movement
Reduced expectations for aggressive rate cuts by the Federal Reserve have also weighed on gold prices. Recent comments from Federal Reserve Chair Jerome Powell have indicated that the central bank may implement two more 25 basis point rate cuts this year if economic conditions evolve as expected. This has diminished the likelihood of more significant rate cuts, which would typically support non-yielding assets like gold.
Powell’s hawkish tone has been reinforced by other Fed officials. Atlanta Fed President Raphael Bostic stated that the central bank should be open to larger rate cuts if the labor market weakens or if inflation trends continue downward. However, market participants are currently assigning only a 35% probability to a supersized rate cut next month, as indicated by the CME Group’s FedWatch Tool.
Upcoming Economic Data: ADP Report and Nonfarm Payrolls
Traders are now looking to the release of the US ADP report on private-sector employment for September, which is expected to show an addition of 120,000 jobs, up from the 99,000 jobs added in August. This report could provide some short-term direction for gold prices. However, the focus will remain on the Nonfarm Payrolls (NFP) report, which is scheduled for release on Friday. The NFP report is a key indicator of the health of the US labor market and will likely have a significant impact on the Federal Reserve’s future policy decisions and, in turn, on gold prices.
Technical Outlook: Key Levels for Gold Price
From a technical standpoint, gold remains within striking distance of the all-time high it reached last week. The recent pullback is testing a key support level at the $2,625-$2,624 region, which had previously served as resistance in a short-term ascending channel. This area now acts as a pivotal support zone, and a decisive break below this level could trigger further selling pressure.
Support Levels to Watch
If the $2,625-$2,624 support is broken, the gold price could fall below the $2,600 mark. The next significant support level lies around the $2,560 zone, followed by the $2,535-$2,530 region. A break below these levels would signal a deeper correction, potentially undermining the recent bullish momentum.
Resistance Levels to Watch
On the flip side, immediate resistance for gold is located in the $2,672-$2,673 area, followed by the $2,685-$2,686 zone, which is close to the all-time high reached last week. A move above the $2,700 mark would likely trigger a fresh wave of buying, setting the stage for an extension of the long-term uptrend that has been in place for several months.
Conclusion: Mixed Sentiment Prevails
In summary, the gold market is currently caught between two opposing forces: the safe-haven demand driven by geopolitical tensions in the Middle East and the limiting effect of a stronger US Dollar and reduced expectations for aggressive Federal Reserve rate cuts. While gold remains well-supported by the uncertain global landscape, its upside potential is capped by the firm USD and resilient US labor market data. Traders will closely watch upcoming economic reports, particularly the US ADP and NFP releases, for fresh direction in the coming days.
With key technical levels in play, the gold price could see increased volatility as traders assess the evolving geopolitical and economic landscape. As long as tensions in the Middle East persist and uncertainty about the Fed’s next moves lingers, gold is likely to remain an attractive asset for investors seeking stability in turbulent times.
