Gold slides on rising US dollar, treasury yields

Gold had been trading at an uptrend, but its rally was halted on Monday and gold prices dropped from $2,690 to $2.660 per ounce. If gold prices rise, they may encounter resistance at $2,726 per ounce, while if gold prices decline, support may be encountered near $2,614 per ounce. 

Gold prices are driven by opposing forces. Increased safe-haven demand due to geopolitical tensions is driving gold prices up. In addition, the recent uncertainty surrounding President-elect Donald Trump’s proposed trade tariffs is driving investors towards safe assets. On the other hand, however, the Fed’s recent hawkish shift is putting pressure on gold prices. 

Last week, conflicting reports on US President-elect Donald Trump’s future economic measures caused market turmoil. The uncertainty surrounding Trump’s proposed tariffs boosted gold prices, as Trump’s risky economic plans raised the demand for safe-haven assets. 

Trump will take office next week on January 20 and his proposed tariffs could potentially ignite trade wars. In addition, Tramp’s plans may reignite inflationary pressures. Concerns that global inflation may rise are propping up gold prices. 

Gold prices have been typically directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar gained strength early on Monday and the dollar index rose above 110.0, its highest value in over two years, but pared gains later in the day dropping back to 109.5. US treasury yields also increased, with the US 10-year bond yield rising from 4.76% to 4.79%. 

Gold prices are under pressure by decreased Fed rate cut expectations. The US Federal Reserve cut interest rates by 25 basis points at its latest meeting to a target range of 4.25% to 4.50%. Fed Chair Jerome Powell delivered a hawkish speech after the meeting, emphasizing the need to be cautious about further rate cuts. Powell stated that the Fed’s approach will remain data-driven and hinted that the pace of future rate cuts will be slower. 

Safe-haven demand remains high, due to uncertainty in the Middle East, boosting gold prices. Tensions between Israel and Lebanon have cooled after the ceasefire deal, but hostilities between Israel and Hamas continue in the Gaza area. Meanwhile, the situation between Russia and Ukraine remains critical.

This week important US economic data releases are likely to cause volatility in gold prices. US inflation data in particular are likely to affect the Fed’s rate outlook and are eagerly awaited by traders. Producer Price Index (PPI) data is due on Tuesday, and more importantly Consumer Price Index (CPI) data on Wednesday will show if inflationary pressures in the US remain high. Wednesday’s inflation report is expected to show that headline inflation rose by 2.9% year-on-year in December from 2.7% in November, indicating that the progress of disinflation is slow.

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Written by:
Myrsini Giannouli

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