Gold Price Struggles to Attract Buyers Amid USD Strength But Downside Remains Protected
Gold prices have shown mixed movement, facing pressure on Friday as the US Dollar (USD) regained strength. Despite moderate selling, gold remains supported, underscoring a cautious outlook due to geopolitical and economic factors. This analysis explores the key market drivers and technical outlook for gold (XAU/USD), providing an in-depth view of how macroeconomic factors and geopolitical concerns are affecting this precious metal’s price action.
Market Movers Affecting Gold: USD Strength and Fed Rate Bets
Gold’s recent behavior is a reflection of both demand and supply dynamics, particularly with the USD’s influence and market expectations around the Federal Reserve’s policy moves.
1. The Influence of USD Strength on Gold Price
On Friday, gold faced selling pressure as the USD’s demand grew, supported by expectations that the Federal Reserve may adopt a more conservative approach towards rate cuts. This USD strength dampened gold’s safe-haven appeal, as a stronger dollar typically makes gold more expensive for international buyers. The dip-buying interest in USD, fueled by solid US economic indicators, has acted as a headwind for the precious metal.
2. Evolving Expectations of Fed Policy Adjustments
While traders are monitoring upcoming Federal Reserve announcements, there is a growing consensus that the Fed may reduce the size of future rate cuts given the economy’s strong footing. Recent US economic data has shown resilience, reducing the likelihood of significant rate cuts. With reduced expectations of monetary easing, bond yields have risen, leading investors to shift focus from gold to USD-backed assets, particularly with the benchmark 10-year Treasury yield reaching a three-month high. This dynamic has placed gold in a tight spot, potentially limiting its upside potential in the near term.
Geopolitical and Domestic US Political Uncertainties Supporting Gold Price
Despite the pressure from USD strength, gold is drawing support from ongoing geopolitical tensions and domestic political uncertainties in the US. These factors are adding an element of caution, preventing a significant downward shift in gold prices.
1. Geopolitical Risks and Rising Tensions in the Middle East
Ongoing conflicts in the Middle East, particularly the military engagements between Israel and Hezbollah in Lebanon, continue to pose risks of escalation. The region’s volatility increases the appeal of safe-haven assets like gold, as investors hedge against potential geopolitical shocks. The situation has been further exacerbated by Israel’s actions in Gaza, which are expected to sustain gold’s attractiveness as a risk-aversion asset.
2. US Political Landscape Ahead of the Presidential Election
With the US presidential election approaching on November 5, political uncertainties are at an all-time high. Polls indicate a close race between Vice President Kamala Harris and Republican candidate Donald Trump. The possibility of contentious post-election results and anticipated policy changes after the election have contributed to a cautious sentiment. Investors are concerned about potential policy shifts and deficit-spending issues, which could influence economic stability, further driving safe-haven interest in gold.
Technical Analysis: Gold’s Key Support and Resistance Levels
From a technical standpoint, gold’s price action has formed a bearish head-and-shoulders pattern on short-term charts. This suggests potential resistance and support zones that traders are closely monitoring.
1. Formation of a Head-and-Shoulders Pattern
The recent price action in gold suggests the formation of a bearish head-and-shoulders pattern, which typically signals a reversal. The neckline of this pattern is located near the $2,705 mark and is expected to act as a strong support level. If gold experiences further selling pressure that breaks this neckline, it could indicate a more significant decline, potentially driving the price down to $2,675 or even the bearish target zone around $2,660.
2. Key Support Levels to Watch
In addition to the neckline, gold has support at multiple levels. The first line of support sits at the $2,700 mark. If this level is breached, a deeper correction may ensue, with prices likely falling towards the $2,675 zone. The downside remains protected due to broader market concerns, and the $2,660 area might act as a floor if bearish pressure intensifies.
3. Resistance Zones and Potential for an Upside Breakout
On the upside, the $2,740 supply zone presents stiff resistance for gold. Should gold prices gain momentum and break through this level, the head-and-shoulders pattern would be invalidated, signaling potential for upward movement. In this scenario, gold could attempt to test its all-time peak around $2,658-2,659, which was touched earlier this week. A successful breakout above this level could propel gold towards the $2,770 mark, followed by a potential test of the $2,800 psychological level, which has acted as resistance over the past four months.
Looking Ahead: Economic Events and Market Sentiment
Gold traders are eyeing key economic data and market sentiment indicators that may influence gold’s near-term direction.
1. Impact of US Economic Data
Later on Friday, traders will closely watch the release of US Durable Goods Orders and the revised Michigan Consumer Sentiment Index. These indicators provide insights into consumer confidence and spending patterns, which could impact market sentiment and drive short-term movements in both the USD and gold. Strong data could further bolster the USD, placing additional pressure on gold prices, while weaker data might enhance gold’s appeal as a safe-haven investment.
2. Treasury Yields and Gold Correlation
The ongoing climb in Treasury yields has been another factor weighing on gold, as higher yields increase the opportunity cost of holding non-yielding assets like gold. Should yields continue to rise, especially if the 10-year Treasury yield maintains its recent highs, this could act as a barrier for gold’s upward movement. Conversely, if bond yields stabilize or decline, gold may find support, potentially allowing it to break through critical resistance levels.
Mixed Outlook Amid Competing Market Forces
The gold market currently faces competing forces: on one hand, the USD’s strength and higher Treasury yields are weighing on prices, while on the other, geopolitical tensions and US political uncertainty lend support. Technically, gold appears to be in a consolidation phase, with downside risks being protected by critical support levels.
For traders, the key will be to monitor how the USD performs relative to Fed policy expectations and how the market responds to geopolitical events. Should USD strength persist, gold may struggle to attract buyers. However, any escalation in global tensions or signs of economic instability could offer substantial support, sustaining gold’s position as a safe-haven asset.
In summary, gold’s near-term trajectory is likely to be shaped by both economic data and political developments, with significant support seen at $2,705 and resistance at $2,740. The next week’s market data and geopolitical developments will be crucial in determining whether gold can break out of its current range or continue consolidating.
