Gold bulls hold edge near one-week top amid geopolitical risks, Fed rate cut bets
- Gold builds on the overnight gains as rising geopolitical risks underpin safe-haven demand.
- Dovish Fed bets drag the USD away from a multi-week high and benefit the XAU/USD pair.
- The fundamental backdrop favors bulls as the focus shifts to the US NFP report on Friday.
Gold (XAU/USD) touches a fresh one-week high during the first half of the European session on Tuesday and seems poised to appreciate further amid a supportive fundamental backdrop. The US military strikes in Venezuela, political tensions between Saudi Arabia and the UAE, the unrest in Iran, and the protracted Russia-Ukraine war keep geopolitical risks in play. This, in turn, is seen underpinning the safe-haven bullion, which, along with dovish US Federal Reserve (Fed) expectations, validates the near-term positive outlook.
In fact, traders are pricing in the possibility of two more interest rate cuts by the US central bank this year, and the bets were reaffirmed by Monday's mixed US PMIs for December. Moreover, concerns about the Fed's independence under US President Donald Trump's administration drag the US Dollar (USD) away from a nearly four-week top set on Monday and back the case for a further appreciating move for the non-yielding Gold. Traders now look to the US Nonfarm Payrolls (NFP) report on Friday for some meaningful impetus.
Daily Digest Market Movers: Gold retains short-term bullish bias amid sustained safe-haven flows, dovish Fed expectations
- President Donald Trump said on Sunday that the US might launch a second military strike on Venezuela if the remaining members of the administration do not cooperate with his efforts to get the country fixed. Trump further warned that Colombia and Mexico could also face military action if they do not reduce the flow of illicit drugs to the US.
- The developments raised concerns about regional instability in Latin America. Separately, Saudi Arabia publicly accused the United Arab Emirates of undermining its national security. This, along with the lack of progress in the Russia-Ukraine peace deal, continues to underpin the safe-haven Gold price for the second consecutive day.
- On the economic data front, the S&P Global reported on Monday that the US Manufacturing PMI held steady at 51.8, pointing to continued expansion. In contrast, the Institute for Supply Management's (ISM) Manufacturing PMI declined to 47.9 last month, from 48.2 in November, and indicated persistent contraction in the business activity.
- The data does little to temper dovish expectations, which drags the US Dollar away from a nearly four-week high touched on Monday and turns out to be another factor that benefits the non-yielding yellow metal. In fact, the Fed is expected to lower borrowing costs in March and deliver one more interest rate cut by the end of this year.
- Traders now look forward to this week's other US macroeconomic indicators, scheduled at the start of a new month, for more cues about the Fed's rate-cut path. The focus, however, will remain on the US Nonfarm Payrolls report on Friday, which will drive the USD in the near-term and provide a fresh directional impetus to bullion.
Gold could climb further towards reclaiming the $4,500 psychological mark
From a technical perspective, the overnight breakout through the 100-hour Simple Moving Average (SMA) and a subsequent move beyond the $4,445-4,450 congestion zone could be seen as a key trigger for the XAU/USD bulls. The Moving Average Convergence Divergence (MACD) histogram has turned positive and inches higher on the 1-hour chart, placing the MACD line marginally above the signal line near the zero mark and suggesting improving momentum.
Meanwhile, the RSI stands at 68 (near overbought), rising from mid-range and supporting firm upside momentum. A push through 70 would strengthen the bull case, while failure to do so could cap gains and encourage consolidation. With price holding above the rising 100-hour SMA and MACD just positive, dips could remain shallow and the near-term bias would stay positive. The 100-hour SMA stands at $4,373.28 and should offer dynamic support.
(The technical analysis of this story was written with the help of an AI tool)
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.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
