Gold Forecast: Sellers return to action as Donald Trump victory lifts US yields

Gold lost 3% on Wednesday as markets reacted to Donald Trump’s victory in the US presidential election.
The near-term technical outlook points to a loss of bullish momentum.
October inflation data from the US and comments from Fed policymakers will be watched closely next week.

Gold (XAU/USD) came under heavy selling pressure and slumped below $2,700 on Wednesday as US Treasury bond yields rallied on Donald Trump’s victory in the US presidential election. Inflation data from the US and Fedspeak next week could offer fresh insights into whether Gold will be able to shake off the bearish pressure.

Gold suffers large losses on Trump’s victory

Gold started the week in a calm manner and registered small gains on Monday and Tuesday as markets refrained from taking large positions ahead of the week’s key risk events.

During the Asian trading hours on Wednesday, the US Dollar (USD) started to gather strength against its rivals and caused XAU/USD to turn south. News of Donald Trump retaking battleground states Georgia and North Carolina triggered a rally in the US Treasury bond yields, further weighing on the Gold price. In the early European session, news outlets started calling Pennsylvania for Trump, a swing state that was widely seen as Kamala Harris’ only chance to turn the election around, all but officially confirming the winner. Republicans also gained the majority in the Senate and looked on track to take control of the House, fuelling another leg higher in US yields and the USD. Gold broke below $2,700 and fell 3% on a daily basis to register its largest one-day loss of the year.

The initial reaction to Trump’s victory suggests that markets expect his proposed policies to pave the way for a high-octane US economy, which could make the Federal Reserve’s (Fed) job of controlling inflation more difficult and cause the US central bank to reassess the policy-easing strategy moving forward.

The data from China showed early Thursday that Exports rose by 12.7% in USD terms on a yearly basis in October, while Imports declined by 2.3% in the same period. As a result, China's trade surplus widened to $95.27 billion from $81.71 billion in September. Gold managed to find a foothold after this data but struggled to gather recovery momentum, with investors turning their attention to the Fed’s policy announcements.

The Fed announced on Thursday that it lowered the policy rate by 25 basis points (bps) to the range of 4.5%-4.75% following the November meeting, as expected. In its policy statement, the Fed said that risks to the job market and inflation were "roughly in balance," echoing language from its September statement. In the post-meeting press conference, Fed Chairman Jerome Powell refrained from hinting on whether they could opt for one more 25 bps cut in December. Powell added that the results of the presidential election will have no effect on the monetary policy in the near term. Following Wednesday’s upsurge, the benchmark 10-year US Treasury bond yield lost nearly 2.5% on Thursday and helped Gold retrace a portion of its weekly decline.

Gold investors await Fedspeak, US inflation report

Stock markets in the US will remain open on Veterans Day on Monday but bond markets will be closed, limiting the market volatility at the beginning of next week.

On Wednesday, The US Bureau of Labor Statistics (BLS) will publish Consumer Price Index (CPI) data for October. Investors expect the CPI and the core CPI, which excludes volatile food and energy prices, to rise by 0.2% and 0.3%, respectively, on a monthly basis. In case the core CPI increases at a softer pace than forecast, the USD could weaken against its rivals with the immediate reaction. On the other hand, an increase of 0.3%, or bigger, in the monthly core CPI could make it difficult for XAU/USD to hold its ground.

Meanwhile, market participants will scrutinize comments from Fed policymakers now that the blackout period is over. The CME FedWatch Tool shows that markets are pricing in about a 70% chance of another 25 bps rate cut in December. If Fed officials adopt a more cautious tone on further policy easing, citing the potential inflationary effects of Trump policies, US T-bond yields could start pushing higher and weigh on XAU/USD.

Gold technical outlook

After dropping below the lower limit of the ascending regression channel coming from June, Gold found support and returned within this channel. The Relative Strength Index (RSI) indicator on the daily chart, however, failed to push higher after recovering to 50, reflecting buyers’ hesitancy.

On the downside, key support area seems to have formed at $2,680-$2,675, where the Fibonacci 23.6% retracement of the uptrend and the lower limit of the ascending channel meet, ahead of the 50-day Simple Moving Average (SMA) at $2,640. A daily close below this support could open the door for another leg lower toward $2,600.

Looking north, the first resistance could be spotted at $2,720 (20-day SMA). In case XAU/USD flips that level into support, technical buyers could take action. In this scenario, $2,760 (mid-point of the ascending channel) could be seen as the next hurdle before $2,790 (record-high).

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.

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