Gold weakens back below $3,950 as Fed hike bets weigh ahead of US midterm elections
- Gold drifts lower as Fed hike bets and rebounding US bond yields lend some support to the USD.
- Hope for Iran diplomacy caps the USD as traders remain on the sidelines ahead of the US elections.
- Tuesday’s release of the US JOLTS Job Openings could also provide some impetus to the bullion.
Gold (XAU/USD) attracts fresh sellers during the Asian session on Tuesday, sliding back below $3,950 and eroding a part of the previous day's recovery gains from a one-year trough set last week amid a modest US Dollar (USD) uptick. Data released on Monday showed that business activity in the US manufacturing sector expanded for the 10th straight month in October. In fact, the Institute for Supply Management's (ISM) Manufacturing PMI surpassed consensus estimates and rose to 55.5 in October from 54.5 in the previous month. This, along with hawkish US Federal Reserve (Fed) expectations and recovering US bond yields, assists the USD in building on the overnight bounce from the vicinity of the late October swing low.
The upside for the USD, however, remains capped as traders are demonstrating a widespread hesitancy ahead of US midterm elections that will decide control of Congress. Prediction markets strongly favor Democrats winning control of both the House of Representatives and the Senate. Meanwhile, a Republican sweep would be a larger market surprise, which could lift US Treasury yields and the US Dollar (USD). Moreover, hopes for a potential diplomatic resolution to end the US-Iran war might further hold back USD bulls from placing aggressive bets. In fact, US President Donald Trump said on Monday that Iran wants to make a deal to end the war and that such an agreement could happen. Moreover, Iranian Foreign Minister Abbas Araqchi said that consultations through mediators were very intensive.
However, several days of negotiations between Iranian officials and Qatari mediators failed to make a breakthrough despite Tehran's revised proposals to reopen the strategic Strait of Hormuz for two days, provided that the US fulfills a set of conditions. Moreover, a fresh escalation of tensions between Russia and Ukraine keeps the geopolitical risk premium firmly in play. This should act as a tailwind for the USD, suggesting that the path of least resistance for gold remains to the downside. On the economic data front, traders will take cues from the release of US JOLTS Job Openings data for some impetus later during the North American session. The focus, however, will remain on the key US monthly employment details, popularly known as the Nonfarm Payrolls (NFP) report, due on Friday.
XAU/USD 4-hour chart
Technical Analysis
The XAU/USD pair maintains a bearish near-term bias beneath the 100-period Exponential Moving Average (EMA) on the 4-hour chart. Adding to this, the overnight failure near the late October swing low and the subsequent slide validates the negative outlook despite a mildly positive Moving Average Convergence Divergence (MACD). Meanwhile, the Relative Strength Index (RSI) near 40.0 hints at only tentative recovery from recently oversold conditions.
Bearish traders, however, would now look to Friday's swing low, around the $3,870 area for potential demand zones, which, if broken, should pave the way for an extension of the well-established downward trajectory. On the topside, immediate resistance is defined by the 100-period EMA at $4,053. A sustained break above this level would be needed to ease downside pressure and open the way for a more constructive recovery phase.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.
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