Gold tumbles to three-week low on Fed chair nomination
- Gold faces some selling pressure in Monday’s early European session.
- Reports that Kevin Warsh would be nominated as the next Fed chair weigh on the Gold price.
- Geopolitical risks and sustained buying by central banks might cap the downside for XAU/USD.
Gold price (XAU/USD) slumps to a three-week low below $4,550 during the early European trading hours on Monday, pressured by some profit-taking. The precious metal extends the decline after reaching historic highs last week amid signs of political stability in the United States (US) as Kevin Warsh was selected to be the next Fed chair, easing concerns over the US central bank’s independence.
On the other hand, ongoing geopolitical tensions, including US-Iran tensions, could underpin traditional safe-haven assets such as Gold. Traders will closely monitor the developments surrounding US-Iran negotiations, along with further clarity on Warsh’s policy direction. Additionally, rising demand from major central banks might contribute to the precious metal’s upside.
The US ISM Manufacturing Purchasing Managers Index (PMI) data will be released later on Monday. The figure is expected to improve to 48.3 in January from 47.9 in December. If the report shows surprise to the downside, this could drag the US Dollar (USD) lower and lift the USD-denominated commodity price, as a weaker USD makes greenback-priced gold more attractive for foreign buyers.
Daily Digest Market Movers: Gold remains under pressure after historic plunge
- Trump said over the weekend that the US will "hopefully" make a deal with Iran. Meanwhile, Iranian Supreme Leader Ayatollah Ali Khamenei warned that any attack on his country would spark a regional conflict, as the US continues to build up its forces nearby.
- "Investors and global central banks have... favored gold as their reserve currency of choice, which they believe insulates them from US policy dependence," said Emma Wall, chief investment strategist at Hargreaves Lansdown. "Certain nations will have observed the threat of Russia having its US dollar assets seized by global players supportive of Ukraine, and subsequently considered the metal a more attractive neutral reserve," she added.
- US President Donald Trump nominated Kevin Warsh to succeed Jerome Powell as the next Fed Chair. He is scheduled to take office in May 2026.
- The US Producer Price Index (PPI) climbed 3.0% year-over-year (YoY) in December, beating estimates of 2.7%, according to the Bureau of Labor Statistics on Friday. The PPI rose 0.5% month-over-month (MoM) in December, above the market consensus and the previous reading of 0.2%.
- Hotter-than-expected US producer price inflation could further strengthen the case for the Fed to hold rates steady while policymakers monitor how inflation trends.
- Markets see nearly an 87% chance of interest rates staying at the current 3.50%–3.75% range, with the first 25-basis-point (bps) reduction likely in June.
Gold keeps a bullish vibe in the longer term, but a neutral RSI warrants caution for bulls
Gold trades in negative territory on the day. However, in the longer term, the path of least resistance is to the upside, as the yellow metal is well-supported above the key 100-day Exponential Moving Average (EMA) on the daily chart. The Bollinger Bands widen, suggesting a strong trend continuation.
Despite the bullish trend, the 14-day Relative Strength Index (RSI) hovers around the midline, indicating that further consolidation or a temporary sell-off cannot be ruled out.
Green candlesticks and sustained trading above the February 2 high of $4,885 could make another run toward the $5,000 psychological level. The next upside barrier to watch is the January 27 high of $5,182.
On the flip side, the first downside target for Gold is seen at the January 19 low of $4,620. Any follow-through selling below the mentioned level could expose the January 12 low of $4,513. The key contention level emerges at the 100-day EMA of $4,275.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
