- Gold price kicks off the new week on a weaker note amid a modest USD recovery.
- Fed rate cut bets and sliding US bond yields cap the USD gains and lend support.
- Renewed trade war fears also contribute to limiting losses for the XAU/USD pair.
Gold price (XAU/USD) trims a part of heavy intraday losses, though retains its negative bias through the first half of the European session and currently trades around the $2,757-2,758 region. The US Dollar (USD) stages a goodish recovery from over a one-month low touched on Friday and turns out to be a key factor exerting downward pressure on the commodity. That said, the risk-off impulse and bets for further policy easing by the Federal Reserve (Fed) help limit the downside for the non-yielding yellow metal.
US President Donald Trump’s decision to impose tariffs on all imports from Colombia revives trade war fears and tempers investors’ appetite for riskier assets. The global flight to safety, along with the possibility that the Fed would cut interest rates twice by the end of this year, triggers a fresh leg down in the US Treasury bond yields. This, in turn, keeps a lid on the USD recovery and warrants some caution before positioning for an extension of the Gold price’s retracement slide from the vicinity of the all-time peak.
Gold price remains depresed amid stronger USD; bears lack conviction amid trade war fears
- The US Dollar, which tracks the Greenback against a basket of currencies, climbs nearly 0.25% amid reviving concerns about US President Donald Trump’s trade policies and prompts some selling around the Gold price on Monday.
- Trump ordered his Administration to introduce emergency 25% tariffs on all goods coming from Colombia after the Colombian government refused to allow two US military planes carrying deported migrants to land in the country.
- Trump warned that the tariffs will increase to 50% by next week if the Latin American country refuses to comply with his immigration policies, fueling trade war fears and tempering investors’ appetite for riskier assets.
- Furthermore, the Wall Street Journal (WSJ) reported that momentum is growing among Trump’s advisers to place 25% tariffs on Mexico and Canada as soon as February 1, without waiting for negotiations or talks.
- In the latest development, the White House confirmed on Monday that Colombia has agreed to all of Trump’s terms, including unrestricted acceptance of all illegal aliens from Colombia returned from the US.
- Meanwhile, Trump said last Thursday that he will demand that interest rates drop immediately, lifting bets that the Federal Reserve would lower borrowing costs further in 2025 and dragging the US Treasury bond yields lower.
- This could act as a headwind for the USD and help limit the downside for the XAU/USD, warranting some caution before confirming that the recent positive move witnessed over the past month or so has run out of steam.
- Traders now look to the US economic docket – featuring Durable Goods Orders, the Conference Board’s Consumer Confidence Index and the Richmond Manufacturing Index – for some impetus later during the US session.
Gold price break below the $2,736 immediate support could pave the way for deeper intraday losses
Any subsequent slide below the $2,750-2,748 zone is likely to find support near the $2,736 area ahead of the $2,725-2,720 strong resistance breakpoint. The latter should act as a key pivotal point, which if broken might prompt some technical selling and drag the Gold price below the $2,700 mark, towards the next relevant support near the $2,665-2,662 area.
On the flip side, momentum beyond the $2,772-2,773 immediate hurdle should pave the way for a move back towards the all-time peak, around the $2,790 region touched in October. Some follow-through buying, leading to a strength beyond the $2,800 mark, will be seen as a fresh trigger for bullish traders and pave the way for an extension of the positive move.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
