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- Gold price ticks lower on Wednesday as the USD surges to a four-month high.
- The Trump trade is back in play following the initial US election exit poll results.
- Expectations for a spike in volatility lend support to the safe-haven XAU/USD.
Gold price (XAU/USD) continues with its struggle to break through the $2,748-2,750 hurdle and attracts some sellers during the Asian session on Wednesday, stalling the overnight bounce from a one-and-a-half-week low. The US exit polls indicate a lead for the Republican nominee Donald Trump in key swing states, which, in turn, prompts aggressive US Dollar (USD) buying and turns out to be a key factor weighing on the commodity.
Meanwhile, speculations about the launch of Trump’s inflation-generating tariffs, along with deficit-spending concerns and bets for a less aggressive easing by the Federal Reserve (Fed), trigger a sharp rally in the US Treasury bond yields. Apart from this, the risk-on impulse exerts additional downward pressure on the non-yielding Gold price, though the lack of strong follow-through selling warrants some caution for bearish traders.
Daily Digest Market Movers: Gold price is weighed down by strong USD and surging US bond yields
- The US Dollar surged to a nearly four-month top in reaction to the US election exit polls, which suggest that the vote is moving in favor of former President Donald Trump.
- Georgia, a key swing state, was among the first of those with available exit polls, showing a Trump victory, and early exit poll results in Wisconsin also point to a Trump win.
- Preliminary results of the exit poll from Pennsylvania, one of the most closely watched swing states, appear in favor of Vice President Kamala Harris, according to CBC News.
- North Carolina exit polls show a close race while Nebraska District 2 initial results show Harris leading. CBC News called Indiana, Kentucky and West Virginia for Trump.
- Rising odds of Trump winning the election fuel speculation about the launch of potentially inflation-generating tariffs and push the US Treasury bond yields sharply higher.
- The yield on the benchmark 10-year US government bond surges over 15 points, or over 3.5% intraday and climbs to 4.44%, hitting its highest level since July 2.
- The US election results clear out a major point of uncertainty for markets, triggering a fresh wave of risk-on trade and further contributing to capping the safe-haven Gold price.
- The downside for the XAU/USD, however, is cushioned as traders remain cautious in the wake of the expected spike in volatility across the global financial markets.
- Iran’s plans for a retaliatory strike against Israel’s attack on its territory on October 26 continue to fuel worries about the risk of a further escalation of tensions in the Middle East.
Technical Outlook: Gold price seems vulnerable while below the $2,748-2,750 supply zone
From a technical perspective, the $2,725-2,720 area might continue to act as immediate strong support, below which the Gold price could accelerate the slide towards testing sub-$2,700 levels. The latter represents the lower boundary of a short-term ascending trend channel extending from late July. A convincing break below should pave the way for an extension of the recent corrective pullback from the all-time peak touched last week and drag the XAU/USD toward the next relevant support near the $2,675 zone en route to the $2,657-2,655 region.
On the flip side, the $2,748-2,750 area now seems to have emerged as an immediate hurdle. The subsequent move up could lift the Gold price to the ascending trend-channel hurdle, currently pegged near the $2,780-2,785 region. This is closely followed by the $2,800 mark, which is likely to act as a key pivotal point. A sustained strength beyond will set the stage for the resumption of the prior well-established uptrend.
US Dollar FAQs
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.
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.
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.
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.