Gold prices enter the American session with the market still seeking direction after last week's US employment data shifted expectations regarding the Federal Reserve.
Weak job growth in September has reduced the likelihood of a Fed rate hike in October; however, the US Dollar and Treasury yields remain elevated, preventing gold from gaining sufficient momentum to move higher.
There is little high-impact US economic data scheduled for release tonight. Consequently, trader attention is focused on speeches by Fed officials Williams and Bowman to gauge whether the Fed is becoming more cautious about labor market weakness or remains concerned about inflation.
ComScore Observer
Trade Balance Not the Primary Catalyst
At 8:30 PM Malaysian time, the US will release the Goods and Services Trade Balance for August.
The deficit is expected to be around US$102 billion, compared to the previous figure of US$88.6 billion.
However, this data is not the main focus for gold tonight.
Following last week's weak employment report, the market is now more interested in the direction of Fed policy. If the Fed begins to pay closer attention to labor market weakness, expectations for higher rates could diminish.
Conversely, if the Fed continues to view inflation as the primary issue, upward pressure on yields and the USD may persist.
Fed in Focus Tonight
Fed official Williams is scheduled to speak at 9:05 PM, while Fed official Bowman will speak at 10:45 PM.
These are the key catalysts to watch.
Markets have significantly scaled back expectations for a rate hike at the October meeting following the weak US employment report. Reuters reported that the probability of an October rate hike has fallen to around 23%, down from over 70% the previous week.
However, the challenge remains that inflation has not yet truly dissipated. The latest ISM Services data shows that the prices-paid component has risen to its highest level since 2022. This signals that price pressures could remain a concern for the Fed.
Consequently, speeches by Williams and Bowman tonight may offer clues as to whether the Fed is more worried about a weakening labor market or persistently high inflation.
**High Yields Remain a Headwind for Gold**
Although expectations for an October rate hike have diminished, Treasury yields remain at very high levels.
The 10-year yield is hovering around 5.3%, while the 30-year yield is near 5.67%; both are approaching levels not seen since 2002.
This is significant for gold because the metal does not generate interest income.
When yields rise, investors have greater incentive to hold assets that provide interest returns. This explains why gold struggles to spark a strong rally, even as expectations for an October rate hike fade.
**Geopolitics**
This is the most crucial aspect to understand tonight.
Tensions in the Middle East and risks to energy corridors, such as the Strait of Hormuz, could indeed boost demand for gold as a safe-haven asset.
However, that effect does not necessarily outweigh the pressures stemming from oil prices and interest rates.
If the conflict escalates and disrupts oil supplies:
Geopolitical tensions rise → oil prices climb → inflation risks increase → the Fed becomes more cautious about easing policy → yields remain high → the USD stays strong → gold comes under pressure.
This is what makes the current situation so complex.
Brent crude remains around US$100 per barrel, and analysts at Heraeus have noted that high oil prices, combined with high bond yields, have been key factors weighing on gold.
Therefore, for gold, geopolitics only becomes a truly bullish driver when safe-haven demand outweighs the negative impacts of oil prices, inflation, yields, and the USD. XAU/USD chart by Saracen Markets
Scenario 1: Fed Remains Hawkish
If Williams and Bowman continue to emphasize inflation risks and the need to maintain high rates, the market could resume buying the USD.
Treasury yields could potentially remain elevated or rise further.
In this scenario, even with ongoing geopolitical tensions, the impact of oil prices and inflation could become the dominant factors.
Implication: Bearish XAU/USD.
Scenario 2: Fed Shifts to a More Dovish Stance
If Williams and Bowman focus more on labor market weakness and signal that further rate hikes are increasingly unnecessary, the market might scale back expectations for high rates.
If the USD and Treasury yields also decline, gold could find room to rebound.
Implication: Bullish XAU/USD.
Scenario 3: Geopolitical Situation Worsens, Oil Prices Surge
This is a scenario that warrants close attention.
If Middle East tensions escalate, causing a significant surge in oil prices, gold might initially see increased safe-haven demand.
However, if rising oil prices cause the market to worry about inflation again and prompt the Fed to adopt a more hawkish stance, gold could quickly lose those gains.
This means traders should not focus solely on geopolitical headlines; they must also monitor the reactions of oil prices, Treasury yields, and the USD.
Implication: Volatility ahead, with downside risk if yields and the USD also surge.
Conclusion
For now, the bias for gold remains neutral to bearish as long as Treasury yields and the US Dollar stay elevated.
The Trade Balance data at 8:30 PM is not the primary catalyst.
The real focus is on speeches by Fed officials Williams (9:05 PM) and Bowman (10:45 PM).
Markets have already scaled back expectations for an October rate hike following weak employment data. Now, Fed commentary will determine whether this shift intensifies or reverses.
A more dovish Fed → USD falls → yields fall → gold has a chance to rebound.
A more hawkish Fed → USD rises → yields rise → gold comes under renewed pressure.
And if the geopolitical situation worsens, do not automatically assume gold will rise. If oil prices surge and reignite inflationary pressures, the impact could be bearish for gold via the Fed, yields, and the USD.
Key focus tonight: Fed Williams → Fed Bowman → USD → Treasury Yields → Gold.
