- Gold rally fails at around $2,720 and pares previous gains amid higher US yields.
- The divergence between the Federal Reserve and the rest of the major central banks is supporting the USD.
- XAU/USD is under growing negative pressure, aiming for $2,660.
Gold (XAU/USD) has given away earlier gains and is trading lower for the second consecutive day during Friday’s European session. The US Dollar (USD) maintains its bullish tone, supported by rising US Treasury yields, which keeps the precious metal under pressure.
Recent US data is showing a resilient US economy with inflation picking up. Donald Trump’s high tariffs for imports and restricted immigration are expected to lift consumer prices, forcing the Federal Reserve (Fed) to approach cautiously with monetary easing next year.
Most of the major central banks, in contrast, are expected to cut rates aggressively, as shown by the European Central Bank (ECB), the Bank of Canada (BoC), and the Swiss National Bank (SNB) this week. This provides a competitive advantage for the Dollar, which has rallied more than 1% so far this week, to the detriment of Gold prices.
Daily digest market movers: Gold pares weekly gains amid a strong US Dollar
- Gold is on track to a moderate advance this week. The uncertainty in the Middle East has provided support to the safe-haven commodity, but the positive momentum faded as markets calmed and the focus shifted to the US economy.
- Data from Thursday showed that US Jobless Claims increased by 242K against expectations of a slight decline to 220K from the previous week’s 225K.
- US Producer Prices were mixed, with the headline PPI accelerating at a 0.4% pace, twice as much as the 0.2% expected, from 0.3% in October. The core PPI eased to 0.2% from 0.3% last month.
- These data cemented hopes of Fed cuts next week and favoured a shallow bounce in Gold prices. However, the US Dollar resumed its bullish trend as the dust settled with investors coming to terms with the view of only gradual Fed cuts in 2025.
- In Europe, the ECB cut rates by 0.25% to 3% against the will of some doves, who wanted more aggressive cuts. The SNB took markets by surprise with a large cut and hinted at more easing.
- These decisions highlighted the divergence in the forward guidance of the Fed and the rest of the major central banks and provided important support for the US Dollar.
- Earlier this week, US consumer prices grew at their fastest pace in seven months, which adds to evidence that the cooling inflationary trend has faded.
Technical analysis: XAU/USD under growing bearish pressure
Gold’s rally was capped again at the $2,720 resistance area earlier this week, and the precious metal is trading lower. Bears appear to be taking control, aiming for a retest of the previous week’s range top between $2,660 and $2,665.
Below here, the pair might find support at the December 9 low at around $2,630 ahead of the channel bottom and the November 25, 26 and December 5 lows at around $2,610.
Upside attempts are likely to find resistance at the $2,700 psychological level and the mentioned $2,730 (November 22 and December 11 highs).
XAU/USD 4-Hour Chart
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
