Gold (XAU/USD) starts the new month on a firm footing, rising to its highest level since October 21 on Monday, as risk-off sentiment supports safe-haven demand, while traders brace for another interest rate cut by the Federal Reserve (Fed) at its December 9-10 monetary policy meeting.
At the time of writing, XAU/USD is trading at around $4,260, putting the metal on track for its best annual performance since 1979. Prices are up nearly 60% so far this year, supported by strong central bank demand, strong ETF flows, ongoing geopolitical tensions and the prospect of lower US interest rates.
Investors are now turning their attention to key US economic data this week, which may influence interest rate cut expectations. Markets are already anticipating a roughly 87% chance of a 25 basis point cut at next week’s meeting, following dovish comments from several policymakers and weak US data last week.
Market drivers: Risk-off mood, Fed outlook guides markets
- The Federal Reserve’s dovish outlook continues to weigh on the US dollar, providing further upside for gold by making the metal more accessible to foreign buyers. The US Dollar Index (DXY), which measures the value of the US currency against a basket of six major currencies, is trading around the 99.09 level, hovering near two-week lows.
- Global stocks came under pressure on Monday as risk aversion took over markets at the start of December. In the United States, investors became cautious ahead of the release of key economic data and the Federal Reserve meeting on December 9-10. Asian markets, especially Japan, were affected by hawkish comments from Bank of Japan Governor Kazuo Ueda. In China, RatingDog’s overall manufacturing PMI fell to 49.9 in November, its lowest level since July, adding to the cautious tone. Meanwhile, the sell-off in cryptocurrencies has also contributed to a broader risk-off environment.
- Markets are also watching a potential change in the Fed’s leadership after US President Donald Trump said on Sunday: “I know who I’m going to choose, yes. We’ll announce it.” Reports indicate that Kevin Hassett is the leading candidate to replace Jerome Powell, raising expectations for a more pessimistic policy path given his previous call for lower interest rates.
- On the geopolitical front, attention is on Russian-Ukrainian peace talks after four-hour negotiations ended in Florida over the weekend. US and Ukrainian officials described the session as “difficult but productive.” US negotiator Steve Witkoff is expected to travel to Moscow today for follow-up talks and may meet with President Vladimir Putin on Tuesday.
- The US economic calendar shows the ISM Manufacturing PMI later on Monday, with consensus forecasting the index to remain in contraction territory at 48.6 compared to 48.7 in October. Next week, the focus turns to the Personal Consumption Expenditures (PCE) report due on Friday.
Technical Analysis: The XAU/USD pair maintains its bullish bias after breaching the triangle
On the 4-hour chart, gold confirmed a successful breakout above a well-defined symmetrical triangle pattern, indicating a bullish continuation structure. The breakout shows an improvement in momentum, although subsequent buying remains limited for now as the Relative Strength Index (RSI) holds in overbought territory near 77.
This keeps prices somewhat tight, with the XAU/USD pair fluctuating within the previous supply zone between $4,250 and $4,270. A clean move above this area would reinforce bullish conviction and open the door to a retest of the all-time high near $4,381.
On the downside, initial support is located at the 21-period simple moving average (SMA) near $4,187, followed by the upper border of the broken triangle pattern.
Federal Reserve Bank Questions and Answers
Monetary policy in the United States is shaped by the Federal Reserve Bank (Fed). The Federal Reserve has two missions: achieving price stability and promoting full employment. The primary tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases borrowing costs throughout the economy. This causes the US dollar (USD) to strengthen because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or when the unemployment rate is very high, the Fed may lower interest rates to encourage borrowing, which affects the dollar.
The Federal Reserve (Fed) holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC meeting is attended by twelve Fed officials – the seven members of the Board of Governors, the New York Fed president, and four of the remaining eleven regional Fed presidents, who serve one-year terms on a rotating basis.
In extreme cases, the Fed may resort to a policy called quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used during crises or when inflation is very low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. Quantitative easing usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, where the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding, to purchase new bonds. This is usually positive for the value of the US dollar.
