Gold (XAU/USD) prices are witnessing a steady decline for the second consecutive day, trading near daily lows amid a robust U.S. dollar rally spurred by post-election optimism surrounding President-elect Donald Trump’s anticipated policies. As the markets digest the potential impact of Trump’s economic agenda, a mix of bullish sentiment around the USD and elevated U.S. Treasury yields are adding significant pressure on the precious metal.
Key Factors Weighing on Gold Prices
1. Trump’s Economic Policies and USD Strength
- Since Trump’s recent election victory, the USD has seen a notable boost, with the so-called “Trump trade” optimism pushing the Greenback towards a four-month high. His anticipated expansionary fiscal policies and a proposed 10% tariff on all U.S. imports have stirred expectations of higher inflation and economic growth, resulting in a stronger dollar.
- For gold, a stronger dollar translates into lower demand, as it makes the metal more expensive for foreign buyers. This USD strength is a core reason why the XAU/USD pair is struggling, as investors gravitate towards the currency in anticipation of growth-friendly policies that may fuel inflation while limiting the Fed’s ability to cut rates aggressively.
2. Federal Reserve’s Cautious Stance on Rate Cuts
- While the Fed recently lowered its benchmark rate by 25 basis points, it also hinted at a cautious approach to further cuts, contingent on economic data. Fed policymakers, including Minneapolis Fed President Neel Kashkari, have stressed the importance of seeing more substantial evidence of inflation returning to the 2% target before committing to further easing.
- Market participants currently predict a 65% chance of an additional rate cut in December. However, these bets could diminish if inflation expectations and bond yields continue to rise, supported by Trump’s inflationary policy agenda.
- As Treasury yields climb, gold—which offers no yield—becomes a less attractive investment, leading to reduced demand.
3. Bond Yields and Non-Yielding Gold
- U.S. Treasury yields have surged in recent weeks, reflecting investor sentiment that Trump’s policies may restrict the Fed’s ability to keep rates low, especially if inflation picks up. High bond yields generally draw investments away from non-yielding assets like gold, which rely on a lower interest rate environment to remain competitive.
4. Trade Tensions and Market Caution
- Trump’s 10% tariff plan is widely expected to revive trade tensions, not only with China but also with other global trading partners, potentially triggering a wave of protectionist policies. This trend could impact the global economy, potentially benefiting safe-haven assets like gold in the long run.
- Nonetheless, in the short term, the current optimism around U.S. economic prospects and the stability in equities are keeping gold under pressure. Should trade wars intensify, however, gold could see renewed support as investors seek refuge from a volatile global market landscape.
Outlook for Gold: What’s Next?
In the immediate term, gold’s direction remains tied to several upcoming U.S. economic indicators, which are likely to impact the USD and bond yields:
- U.S. Consumer Price Index (CPI) on Wednesday: Inflation data will be closely watched for any signs of rising prices that could deter the Fed from cutting rates further.
- Producer Price Index (PPI) on Thursday and Retail Sales on Friday: Both these reports will offer insights into consumer demand and price pressures, helping the Fed gauge the economic health.
- Fed Chair Jerome Powell’s Speech: Powell’s commentary on the economic outlook and inflation trends will be crucial in setting market expectations for the Fed’s rate-cut path.
In light of these factors, Totafx Capital advises that while gold is currently trading near a critical support level of $2,800, any bullish resurgence will depend heavily on USD dynamics and global trade developments. If the U.S. dollar continues to strengthen, gold prices may face further downward pressure. However, a surprise dovish tilt by the Fed or escalating trade tensions could provide a temporary lift to gold as a safe haven.
Technical Analysis for Gold
According to Totafx Capital’s technical analysis, gold faces strong resistance at $2,820, while immediate support is seen at $2,750. A decisive break below this level could lead to a test of $2,700, while a bounce above $2,820 may open the door for a rebound towards the October highs.
Supports and Resistances:
- Resistance Levels: $2,820, $2,840
- Support Levels: $2,750, $2,700
The Relative Strength Index (RSI) remains neutral, signaling that gold is neither overbought nor oversold. However, the Moving Average Convergence Divergence (MACD) indicator is trending downward, suggesting a potential bearish momentum continuation.
Disclaimer: This market analysis is provided by Totafx Capital and is intended for informational purposes only. Please consider your own financial situation and seek professional advice before making trading decisions.