Gold Price Draws Support from Hopes for Fed Rate Cuts, Stronger USD Caps Gains

Gold (XAU/USD) is back in the spotlight, recovering from a dip in the Asian session and trading near its weekly highs of around $2,660 as we approach the European session. But this bounce is cautious, and it’s clear that bulls aren’t diving in with full conviction just yet. Why? It all boils down to the Federal Reserve’s (Fed) rate cuts, geopolitical tensions, and the ongoing strength of the US dollar. Let’s break it down.

What’s Propping Up Gold?

Gold has always been a safe-haven asset, especially in times of uncertainty. And right now, there’s plenty of that, with escalating geopolitical risks and increasing bets that the Fed is going to cut rates further. These factors provide crucial support to the metal. But despite this, gold’s upside is being capped by the stronger US dollar, which is hovering near its recent highs, and elevated Treasury bond yields.

Geopolitical Tensions & Fed Policy Support Gold

The Middle East is heating up, and that’s causing risk aversion across global markets. Geopolitical conflicts tend to drive investors to safer assets like gold, so it’s no surprise that regional tensions are helping to buoy prices.

At the same time, the market is largely convinced that the Fed will cut interest rates by 25 basis points in November. The latest US Producer Price Index (PPI) data shows that inflation pressures are easing, giving the Fed more room to ease up on its aggressive rate-hike stance. This combination of easing inflation and geopolitical uncertainty continues to underpin the price of gold.

What’s Capping Gold’s Gains?

While gold is drawing support from these factors, there’s a cap on its gains. Thanks to elevated Treasury bond yields, the US dollar has been stubbornly strong. Investors have priced out the possibility of an oversized rate cut by the Fed, leaving yields on US Treasury bonds above 4%—which, in turn, helps keep the dollar near its highest level in two months. A stronger dollar makes gold more expensive for buyers holding other currencies, limiting its appeal.

Adding to the cautious tone is China. While there’s optimism about the country’s pledge to boost debt and revive its economy, the details are scarce. Investors are holding back from making bullish bets on gold until they see more concrete steps from Beijing.

XAU/USD Daily Price Chart

Source: TradingView, prepared by Richard Miles

Market Movers: What’s Shaping Gold Right Now

Let’s look at some key market movers that are influencing gold prices:

• US Producer Price Index (PPI): September’s data showed a 1.8% rise in the headline PPI and a 2.8% increase in the core measure on a yearly basis. While these figures were slightly higher than expected, they still point to a deceleration in price rises, which should allow the Fed to continue cutting rates.
• Fed Rate Cut Odds: According to the CME Group’s FedWatch Tool, there’s now a 90% chance that the Fed will cut interest rates by 25 basis points in November. This has been a key factor supporting gold prices.
• US Dollar Strength: Despite the expectations of rate cuts, the US dollar remains strong, thanks to high bond yields. The 10-year US Treasury bond yield is holding steady above 4%, and this is playing a big role in limiting gold’s upside.
• Geopolitical Tensions: Escalating conflicts in the Middle East are boosting demand for gold as a safe-haven asset. However, traders remain cautious as any developments could rapidly change the outlook.
• China’s Economic Situation: Over the weekend, China’s Consumer Price Index (CPI) data showed flat growth in September, with the yearly rate standing at 0.4%, missing market expectations. This, along with a lack of detailed information about China’s fiscal stimulus plans, has kept traders wary about making bold moves on gold.

Technical Outlook: Are Gold Bulls in Control?

From a technical standpoint, gold seems to favor bulls in the short term. However, there’s still a need for more follow-through buying before we see any significant moves higher.

Key Support Levels

If gold starts to slip, here’s where it might find some buying interest:

• $2,632-$2,630: This region should act as immediate support. A break below this could lead to a quick slide toward the $2,600 mark.
• $2,600: If gold fails to hold this level, bearish traders could take control and push prices further down. The next key level would be around $2,560.
• $2,530-$2,500: This psychological level will be crucial for traders to watch. If gold drops this low, it could trigger a broader sell-off.

Key Resistance Levels

On the flip side, gold’s upside will depend on its ability to clear these key resistance levels:

• $2,660-$2,662: This is a crucial horizontal resistance zone. The bulls will want to see a break above this before getting more confident.
• $2,685-$2,686: This is where gold topped out in September. If the metal manages to climb this high, it could be headed for a fresh all-time high.
• $2,700: A decisive break above this psychological level would signal the continuation of gold’s long-term uptrend and could spark a wave of buying.

What to Watch Going Forward

Gold is stuck in a bit of a tug-of-war right now. On one hand, geopolitical tensions and expectations of Fed rate cuts are providing strong support. On the other hand, the robust US dollar and elevated Treasury yields are keeping a lid on any major upside moves.

With Columbus Day closing US markets, it’s likely that gold will remain at the mercy of USD price dynamics and any fresh geopolitical developments. For now, traders should keep an eye on the $2,660 resistance level—if gold breaks above this, we could see some more significant gains in the coming days.