Gold rallies on US credit downgrade, bulls target $3,300
- Gold gains over 1.5% despite firm US yields as markets digest US fiscal downgrade, Fed caution, and global rate cuts.
- Moody’s downgraded US credit rating from AAA to AA1 last Friday, dampening risk sentiment and boosting Gold demand.
- Fed officials remain cautious with Bostic favoring just one 2025 rate cut; Hammack warns of rising stagflation risks.
- Global rate cuts by the PBoC and RBA add to bullish momentum for non-yielding assets like Gold.
Gold price advances for the second straight day on Tuesday as the Greenback continues to print losses due to uncertainty about trade policies and the fiscal health of the United States (US) following last Friday’s Moody’s US debt downgrade. The XAU/USD trades at $3,289, up by more than 1.50% at the time of writing.
Demand for the yellow metal has increased as US equity markets turned red during the North American session. Moody’s adjustment to US government debt from AAA to AA1, stable with a negative outlook, weighed on investor sentiment, leading to increased positions in Gold.
In the meantime, Federal Reserve (Fed) officials' tone remains cautious. However, none of them has opened the door for reducing interest rates amid an ongoing economic slowdown in the US. On Monday, the Atlanta Fed’s Raphael Bostic said that he favors one cut in 2025.
Beth Hammack of the Cleveland Fed stated that US government policies have increased the difficulty for the Fed to manage the economy and fulfill the dual mandate role. She said that the odds of a stagflationary scenario are rising. Recently, the St. Louis Fed's Alberto Musalem noted that monetary policy is well-positioned.
Consequently, US Treasury yields remain elevated during the session, but it has not been an excuse for Gold prices to rally.
Major central banks reducing interest rates are also bullish for Bullion. During the Asian session, the People’s Bank of China (PBoC) lowered interest rates, followed by the Reserve Bank of Australia (RBA), which cut the Cash Rate from 4.10% to 3.85%.
Aside from this, geopolitics are also playing a role in setting XAU/USD prices higher as failure to achieve a ceasefire between Russia and Ukraine and rising tensions in the Middle East could keep investors leaning into the yellow metal.
This week, traders will eye Fed speeches, Flash PMIs, housing data and Initial Jobless Claims.
Gold daily market movers: Rally extends amid heightened US yields and hawkish Fed commentary
- US Treasury bond yields have risen due to Moody’s actions with the US 10-year Treasury note yield at around 4.477%, up almost three basis points (bps). Meanwhile, US real yields are also up three bps at 2.117%.
- The US Dollar Index (DXY), which tracks the performance of the US currency against six others, falls 0.21% to 100.17. Although it remains off daily lows of 100.06, traders seeking safety have moved to the yellow metal.
- St. Louis Fed President Alberto Musalem said that if inflation expectations become de-anchored, the Fed's policy should be centered on price stability. He said that there is uncertainty if tariffs would have a temporary or persistent effect on inflation.
- Last week, Moody’s, the international rating agency, downgraded the US government rating from AAA to Aa1. They highlighted that more than a decade of inaction by successive US administrations and Congress has contributed to the country’s worsening fiscal position, raising concerns over long-term debt sustainability.
- Given the backdrop, major banks are convinced that the yellow metal will continue to rally heading into next year. Goldman Sachs forecasts Bullion to average $3,700 an ounce by year-end, then reach $4,000 by mid-2026.
XAU/USD technical outlook: Double top negated, Gold surge continues
Gold price is set to extend its rally and negate a ‘double top’ chart pattern that emerged five days ago. As the yellow metal has continued to register successive days of higher highs and lows, XAU/USD could reach $3,300 in the near term.
Momentum favors buyers as depicted by the Relative Strength Index (RSI). With that said, once Bullion clears $3,300, the next resistance level will be the $3,350 psychological barrier, followed by the $3,400 mark. A breach of the latter will expose the May 7 peak at $3,438, ahead of $3,500.
Conversely, if Gold falls below $3,250, the next support would be $3,200, followed by the 50-day Simple Moving Average (SMA) at $3,176. A breach of the latter will expose $3,100.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
Author
Christian Borjon Valencia
FXStreet
Markets analyst, news editor, and trading instructor with over 14 years of experience across FX, commodities, US equity indices, and global macro markets.
