• Gold tumbles as 10-year Treasury yield surges above 5.1%.
• October Fed hike odds jump to 70% after hawkish remarks.
• Booming US PMIs strengthen Dollar and deepen Bullion sell-off.

Gold sank by over 1.5% during the North American session on Wednesday as investors grew confident that the Federal Reserve (Fed) would raise rates at the October meeting. That confidence stems from hawkish remarks made by several officials. The XAU/USD trades at $4,285 after reaching a high of $4,369.

XAU/USD slides as strong PMIs propel October tightening bets higher

Developments in the Middle East had pushed US Oil prices to near $90 earlier in the week. But breaking news of a potential US diesel export ban reversed Crude prices on Wednesday as West Texas Intermediate (WTI) rallied over 1.5% to $91.42 per barrel.

According to Politico sources, the Trump administration is preparing a plan to ban diesel exports for 90 days in a bid to push energy prices down. After the headline, Crude futures edge lower, while the Greenback remains underpinned.

The US Dollar Index (DXY), which tracks the performance of the American currency against six others, is up 0.7% at 101.22, a headwind for the yellow metal.

Regarding the US-Iran conflict, hopes of de-escalation increased after Reuters reported that a senior Iranian official said Tehran is reviewing the US response to its proposal to end hostilities.

Last Wednesday, the Federal Reserve raised rates by 25 basis points to reduce a “doze of accommodation,” according to Fed Chair Warsh. Besides this, the dot plot revealed that the majority of officials expect another interest rate increase towards the end of the year.

Following the meeting, most Fed officials expressed their views on the September 15-16 meeting and the reasons for their decisions, with the majority noting that inflation is too high and has remained above the Fed’s 2% goal for too long.

The week began with the Minneapolis Fed's Neel Kashkari, saying that inflation is too high in “all aspects“ of the US economy. The St. Louis Fed's Alberto Musalem said that more rate hikes are likely needed to tame inflation, while the Chicago Fed's Austan Goolsbee said that strong demand may be adding to inflation.

On Tuesday, Boston Fed's Susan Collins followed suit, warning of elevated inflation risks and backing the rate increase. After her, Richmond Fed Thomas Barkin said that inflationary shocks could take some time, while Fed Governor Michael Barr said that further rate hikes will likely be needed.

Given that uniform response, money markets expect US interest rates to rise higher. Odds of a Fed rate hike at the October meeting are 66%, up from 52% a day ago, according to Prime Terminal.

Consequently, US 10-year Treasury yields soared by 15 basis points to 5.12%.

S&P Global announced that the September US Flash Manufacturing PMI of 57.0 far surpassed expectations of 53.5 and was higher than the previous month's 53.9. Meanwhile, the Services PMI increased from 56.5 to 58.7, beating forecasts, and the Composite PMI rose from 56.0 to 58.4.

Ahead, the US economic schedule will feature speeches by Fed’s Beth Hammack and Anna Paulson, along with jobless claims data.

XAU/USD technical outlook: Gold drifts lower inside a ‘bullish-wedge’

Gold just failed to clear the top of a ‘bullish wedge’ and dropped beneath the confluence of the 100-day and 50-day Simple Moving Averages (SMAs) at $4,313 and $4,306, respectively, extending its losses below $4,300.

Momentum, as depicted by the Relative Strength Index (RSI), is bearish below its 50-neutral level and is aiming lower, indicating that sellers are stepping in. Still, per the market structure, Gold is tilted to the upside, but mixed readings between price action and sentiment suggest that waiting for confirmation is warranted.

For a bearish resumption, Gold must surpass the September 16 swing low of $4235. Once hurdled, the next stop is the July 6 high-turned-support at $4,202, followed by the July 29 pivot low at $3,996.

On the upside, XAU/USD might clear the ‘bullish wedge’ top trendline at around $4,365-$4,370, ahead of testing $4,400. Up next lies the $4,500 and the 200-day SMA at $4,541.

Gold FAQs

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.