$4,060 recaptured: Gold rises as Oil pulls back before key Fed decision

$4,061: Gold gains over 1% following a test of $3,989.
$100 in focus as WTI pulls back, easing energy-led inflation pressure.
83% probability of a December Fed hike as markets await Warsh's remarks.

XAU/USD is trading at $4,061. Gold has recovered from a daily low of $3,989 to gain over 1% on Tuesday, despite advances in the US Dollar and US Treasury yields. Lower Oil prices are supporting the precious metal as investors prepare for Wednesday's Federal Reserve (Fed) decision.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

XAU/USD recovers as cheaper Oil eases inflation pressure despite higher US yields

Geopolitical developments are setting the direction for prices, with US Oil benchmark West Texas Intermediate (WTI) down more than 1% at $100.05 per barrel. Today's US economic releases offered little guidance for Gold, which reversed an initially weaker opening to move into positive territory.

A quick end to the Middle East conflict appears unlikely, with US-Iran negotiations seemingly at a standstill. Recent reports suggest the US and Israel are likely to renew their attack on Tehran after the Israeli elections and US midterm elections. Those reports drove WTI above $100.00 on Monday.

Market participants largely looked past weaker-than-expected US housing figures. According to the Conference Board, Consumer Confidence climbed from 84.2 to 91.7 in October as Americans became more upbeat about employment and business conditions. Inflation expectations, however, held steady at the previous reading of 5.8%.

September's Durable Goods Orders increased by 1.8%, compared with 0.1% previously, with business investment remaining robust as AI infrastructure expanded. By contrast, the 4-week average for ADP Employment Change slipped from 18.5K to 16.8K, pointing to a modest cooling in the labour market.

Fed Chair Kevin Warsh's speech is the main focus for traders, as it could clarify the next policy move at the December meeting. The monetary policy statement is unlikely to command as much attention unless it takes an aggressively hawkish tone. Money markets assign a 9% probability to a rate increase, an outcome that would surprise markets ahead of the US midterm elections.

Alongside the Fed, two other central banks are expected to raise rates amid concerns that energy prices will keep climbing. The European Central Bank (ECB) announces its decision on Thursday, with the Bank of Japan (BoJ) following on Friday. For Thursday's meeting, the ECB is expected to hold rates steady.

An 83% probability of a 25-basis-point Fed rate rise in December is priced in, according to Prime Terminal data. While the odds still favour an increase, they have continued to decline from last week's 90%.

Fed rate probabilities | Source: Prime Terminal

Thursday also brings US Gross Domestic Product (GDP) data and the core Personal Consumption Expenditures (PCE) Price Index, the Fed's preferred inflation measure. Traders are monitoring both releases.

$4,000 defended, $4,100 in focus: XAU/USD technical outlook

Gold's "bullish harami" candlestick formation received confirmation today as XAU/USD moved above October's 23-day high of $4,034. Short-term momentum favours buyers, but the Relative Strength Index (RSI) remains bearish, calling for caution.

Near $4,100, a resistance trendline drawn from around the September highs marks the next upside area to watch. A break above it would bring $4,200 into view. Further resistance lies at the 100-day Simple Moving Average (SMA) of $4,219, followed by the 50-day SMA at $4,288.

A fall below $4,000 would leave XAU/USD vulnerable to a test of last Friday's $3,975 low. Below that, key support sits at the July 17 low of $3,959 and the year-to-date (YTD) trough of $3,941.

Gold: frequently asked questions

Reasons for investing in Gold

Widely used to preserve wealth and facilitate exchange, Gold has held an important place throughout human history. Beyond its lustre and role in jewellery, it is now broadly regarded as a safe-haven asset and therefore a good investment during periods of turmoil. Because it is not dependent on a particular issuer or government, Gold is also widely considered a hedge against inflation and currency depreciation.

Gold's largest buyers

The largest holders of Gold are central banks. To support their currencies during unsettled periods, they typically diversify reserves and purchase Gold, reinforcing perceptions of economic and currency strength. Substantial Gold holdings can underpin confidence in a country's solvency. World Gold Council data show that central banks increased their reserves by 1,136 tonnes of Gold, valued at around $70 billion, in 2022. That was the largest annual purchase on record. Emerging-market central banks, including those in China, India and Turkey, are rapidly expanding their Gold holdings.

Gold's relationship with other assets

Both the US Dollar and US Treasuries are major reserve and safe-haven assets, and Gold tends to move inversely to them. Dollar weakness generally supports Gold, helping investors and central banks diversify their holdings in turbulent periods. An inverse relationship also exists between Gold and risk assets. Equity market gains typically put pressure on Gold, whereas selling in riskier markets generally supports the precious metal.

Key drivers of Gold prices

Numerous factors influence Gold prices. Its safe-haven appeal means geopolitical turmoil or concerns about a severe recession can trigger rapid gains. Gold pays no yield, so lower interest rates tend to support it, while higher borrowing costs usually weigh on the metal. Nevertheless, the US Dollar (USD) drives most price movements because Gold is dollar-denominated (XAU/USD). A stronger Dollar typically restrains Gold prices; a weaker one is likely to lift them.