- Gold price staged a modest recovery from a nearly two-month low touched on Tuesday.
- Elevated US bond yields and bullish USD cap gains for the non-yielding XAU/USD.
- Traders now look forward to the key US Consumer Price Index report a fresh impetus.
Gold price (XAU/USD) struggles to capitalize on its modest intraday recovery gains on Wednesday, albeit it manages to hold above the $2,600 mark and the lowest level since September 20 touched the previous day. The US Dollar (USD) sticks to its bullish tone amid expectations that US President-elect Donald Trump’s proposed expansionary policies will boost inflation and limit the scope for the Federal Reserve (Fed) to cut interest rates aggressively. The outlook remains supportive of elevated US Treasury bond yields, which continue to underpin the USD and cap the non-yielding yellow metal.
Meanwhile, the uncertainty over Trump’s promised trade tariffs and their impact on the global economy tempers investors’ appetite for riskier assets against the backdrop of the underwhelming fiscal stimulus from China. This, in turn, offers some support to the safe-haven Gold price, which, for now, seems to have snapped a three-day losing streak. The market focus remains glued to the release of the US consumer inflation figures. The crucial US Consumer Price Index (CPI) report might influence expectations about the Fed’s rate-cut path and determine the near-term trajectory for the XAU/USD.
Gold price attracts haven flows amid softer risk tone, lacks follow-through
- The US Dollar climbed to its highest level since early May on Tuesday amid optimism over US President-elect Donald Trump’s proposed expansionary policies and dragged the Gold price below the $2,600 mark for the first time since September.
- Furthermore, the likelihood of Trump’s protectionist tariffs being implemented should put upward pressure on inflation and limit the scope for the Federal Reserve to cut interest rates, which remain supportive of elevated US bond yields.
- Richmond Fed President Tom Barkin said Tuesday that inflation might be coming under control, though the path remains uncertain and that the core gauge might give a signal that it risks getting stuck above the central bank’s 2% target.
- Separately, Minneapolis Fed President Neel Kashkari noted that any upside surprise in inflation in the weeks leading up to the December FOMC monetary policy meeting could encourage the central bank to pause interest rate cuts.
- The yield on the benchmark 10-year US government bond remains close to a multi-month peak touched after Trump’s victory in the US presidential election amid reduced bets for aggressive interest rate cuts by the Fed going forward.
- The USD bulls take a brief pause for a breather and look to the release of the latest US consumer inflation figures, which will play a key role in influencing market expectations about the Fed’s rate-cut path and provide a fresh impetus.
- The headline Consumer Price Index (CPI) is expected to have risen by 0.2% in October and by 2.6% over the past 12 months, up from 2.4% in the prior month, fueling doubts over how much headroom the Fed has to keep cutting rates.
Gold price consolidates around 38.2% Fibo. level before the next leg down
From a technical perspective, the overnight resilience below the 38.2% Fibonacci retracement level of the June-October rally and the subsequent move-up warrants caution for bearish traders. That said, oscillators on the daily chart are holding deep in negative territory and are still away from being in the oversold zone. This, in turn, suggests that the path of least resistance for the Gold price is to the downside.
Hence, any subsequent move up could be seen as a selling opportunity and remain capped near the $2,630-2,632 resistance. That said, some follow-through buying could lift the Gold price to the next relevant hurdle near the $2,650-2,655 region, en route to the $2,670 level. This is followed by the $2,700 mark, which if cleared decisively will suggest that the recent corrective fall from the all-time peak has run its course.
On the flip side, bearish traders need to wait for acceptance below the $2,600 mark and the 38.2% Fibo. level before placing fresh bets. The subsequent fall might then drag the Gold price to the $2,540 confluence – comprising the 100-day Simple Moving Average (SMA) and the 50% Fibo. level. This could act as a strong near-term base for the XAU/USD, which if broken will be seen as a fresh trigger for bearish traders.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
