Gold eases from one-week top amid the emergence of some USD dip-buying

Gold price scales higher for the second straight day as geopolitical risks drive some haven flows.
Bets for less aggressive Fed rate cuts underpin the USD bulls and cap gains for the commodity.
The risk-on mood further warrants caution before placing bullish bets around the XAU/USD.

Gold price (XAU/USD) maintains its bid tone through the early part of the European session and currently trades around the $2,620 region, just below a one-week high touched this Tuesday. Geopolitical risks stemming from the protracted Russia-Ukraine war and the ongoing conflicts in the Middle East turn out to be key factors driving haven flows towards the precious metal for the second straight day. That said, reduced bets for a more aggressive policy easing by the Federal Reserve (Fed) cap the upside for the non-yielding yellow metal.

Investors now seem convinced that US President-elect Donald Trump's expansionary policies could rekindle inflationary pressures and limit the scope for further interest rate cuts by the Fed. This keeps the US Treasury bond yields elevated and helps the US Dollar (USD) to stall its corrective pullback from the year-to-date touched last week. Apart from this, a generally positive tone across the global equity markets caps gains for the Gold price, warranting some caution before confirming that the recent pullback from the all-time peak has run its course.

Gold price benefits from geopolitical tensions; less dovish Fed expectations act as a headwind

US President Joe Biden's decision to authorize Ukraine to use long-range American missiles against military targets inside Russia prompted some haven flows and benefited the Gold price on Monday.
The US Dollar extended its profit-taking slide from the year-to-date high touched last week on the back of retreating US Treasury bond yields and provided an additional boost to the XAU/USD.
The precious metal attracts some follow-through buying for the second straight day on Tuesday, though reduced bets for more aggressive rate cuts by the Federal Reserve might cap the upside.
US President-elect Donald Trump's incoming administration is expected to focus on lowering taxes and raising tariffs, which could stoke inflation and limit the Fed's ability to ease monetary policy.
A slew of influential FOMC members, including Fed Chair Jerome Powell, recently suggested caution in cutting rates, which, in turn, favors the USD bulls and should cap the non-yielding yellow metal.
Tuesday's US economic docket features the release of Building Permits and Housing Starts. Adding to this, a speech by Kansas Fed President Jeffrey Schmid will drive the USD later during the US session.
The focus, however, will remain glued to manufacturing and service sector PMI data on Friday, which could offer early cues on how companies are reacting to the threat of Trump's proposed trade tariffs.

Gold price bears need to wait for sustained break and acceptance below the $2,600 mark

The overnight strong move up comes on the back of last week's resilience below the 100-day Simple Moving Average (SMA). Moreover, the momentum pushed the Gold price beyond the 23.6% Fibonacci retracement level of the recent corrective decline from the all-time peak and underpins prospects for additional intraday gains. That said, oscillators on the daily chart – though they have been recovering from lower levels – are yet to confirm a positive bias. Hence, any subsequent strength is more likely to face stiff resistance near the $2,634-2,635 region or the 38.2% Fibo. level. Some follow-through buying, however, could trigger a short-covering rally towards the $2,655-2,657 congestion zone en route to the $2,664-2,665 area.

On the flip side, the $2,600 mark, which coincided with the 23.6% Fibo. level, now seems to protect the immediate downside. A convincing break might expose the next relevant support near the $2,569-2,568 region and eventually drag the Gold price to the 100-day SMA, currently pegged near the $2,551-2,550 area. Some follow-through selling below last week's swing low, around the $2,536 zone, will be seen as a fresh trigger for bearish traders and pave the way for a fall towards the $2,500 psychological mark.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.

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