Gold picks up, the US Dollar slides after soft US data
- Gold os trading moderately higher as the US Dollar rally stalled.
- Weak US manufacturing data and lower US yields are weighing on the Greenback on Monday.
- XAU/USD remains under pressure, dangerously close to the $2,635 support area.
Gold (XAU/USD) has opened the week on a moderately positive tone, with the US Dollar (USD) weighed by a slight pullback on US Treasury yields and softer-than-expected US manufacturing figures. The precious metal, however, remains close to recent lows following a 2.5% sell-off late last week.
US Treasury yields retreated on Monday following a sharp rally last week, erasing some of the recent bullish pressure on the US Dollar. Investors seem wary of placing directional US Dollar bets as they brace for the all-important Federal Reserve (Fed) monetary policy decision on Wednesday.
The market is almost fully pricing an interest rate cut, but only gradual easing next year. This, coupled with expectations that Donald Trump’s policies will stir inflationary pressures, is acting as a tailwind for the US Dollar.
Daily digest market movers: Gold finds support amid ongoing geopolitical tensions
- Gold is suffering on expectations of a shallow Fed easing cycle but keeps drawing support from the highly volatile situation in the Middle East.
- Israel keeps attacking military targets in Syria and considering an expansion of the Golan Heights settlements, which has met with the opposition of Saudi Arabia, Qatar, and the United Arab Emirates.
- In the fundamental domain, the US NY Empire State Manufacturing Index deteriorated to 0.2 in December, well beyond the 12 reading anticipated nby the market consensus and also below the 31.2 reading posted in November.
- Later today, the US S&P Preliminary PMIs are expected to show a moderate contraction in manufacturing activity and slower growth in the services sector.
- The impact of these figures on the Dollar, however, is likely to remain contained, with all eyes on Wednesday’s Fed decision.
- US 10-year yields have eased from 4.40% to 4.37% after having rallied for five days last week. The 2-year yield, more sensitive to interest rate expectations has ticked down from 4.25% highs last Friday to 4.22% lows
- The CME Group’s Fed Watch Tool shows a 97% chance that the US central bank will cut interest rates by 25 basis points on Wednesday. Still, for 2025, markets are pricing in just two more cuts, fewer than the three seen earlier this month.
Technical analysis: XAU/USD remains under bearish pressure
Gold’s rally was capped again at the $2,720 resistance area last week before trading lower. A potential double top at the aforementioned level and Thursday’s bearish engulfing candle are giving hopes for bears.
The support area at $2,635 is holding the downside attempts, but the commodity is lacking upside momentum. Previous support levels at $2,675 might act as resistance ahead of the $2,692 (December 12 high) level.
On the downside, below the December 9 low at around $2,630, the next bearish target would be the November 25, 26, and December 6 low at around $2,610.
XAU/USD 4-Hour Chart
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
