• Gold is recovering on Tuesday as safe-haven demand increases following Israel’s invasion of Lebanon.  
• Fed Chairman Powell adopts a more cautious, data-dependent stance, which caps gains for the yellow metal.
• Technically, XAU/USD is at risk of reversing its short-term uptrend and pushing lower.  

Gold (XAU/USD) recovers marginally to trade in the $2,640s per troy ounce on Tuesday after the Israeli army mounts a ground invasion of Lebanon, stoking geopolitical tensions and increasing safe-haven demand for Gold. This, and the fading effect of China’s stimulus program, which temporarily diverted capital back into property and rallying Chinese equity markets, combine to help the yellow metal recover after two consecutive days of losses. 

Gold may see upside limited by Fed commentary

Gold will probably see upside capped, however, by comments from the Federal Reserve (Fed) Chairman Jerome Powell, who said on Monday that although the Fed made a larger-than-standard 50 basis points (bps) (0.50%) cut to interest rates at its last meeting, that did not automatically imply the same would happen at future meetings. 

Powell said the FOMC is “not a committee that feels like it is in a hurry to cut rates quickly,” during his speech at the NABE conference. The Fed Chairman inferred that the Fed would probably make two more 25 bps cuts to interest rates before the year-end, but that it was not on a “pre-set course.”

The market-based probabilities of the Fed reducing interest rates by 50 bps at its November meeting have fallen from over 60% last week to the mid-30% level on Tuesday, according to the CME FedWatch tool. 

Apart from Powell’s comments, stronger-than-expected data has also reduced bets of another “jumbo” rate cut. The decline in chances of a larger cut has weighed on Gold, which is negatively correlated to interest rates. The yellow metal is a non-interest-bearing asset, so when interest rates are lower, it becomes more attractive to investors, and vice versa if rates remain high or rise.