Gold (XAU/USD) reached a one-week high during the first half of the European session on Tuesday and appears poised to rise further amid a supportive fundamental backdrop. US military strikes in Venezuela, political tensions between Saudi Arabia and the UAE, unrest in Iran, and the protracted war between Russia and Ukraine all make geopolitical risks present. This in turn is seen to support safe-haven bullion, which, combined with the US Federal Reserve’s dovish outlook, validates the positive near-term outlook.
In fact, traders are anticipating the possibility of the US central bank making two more rate cuts this year, and bets were confirmed by mixed US PMIs on Monday for December. Moreover, concerns about the independence of the Federal Reserve under the administration of US President Donald Trump have pulled the US dollar away from the nearly four-week high it hit on Monday and support the case for further upward movement in non-yielding gold. Traders are now looking to the US Non-Farm Payrolls (NFP) report on Friday for some useful momentum.
Market drivers in daily summary: Gold maintains short-term bullish bias amid ongoing safe haven flows and dovish Fed outlook
- President Donald Trump said Sunday that the United States may launch a second military strike on Venezuela if the rest of the administration does not cooperate with his efforts to reform the country. Trump also warned that Colombia and Mexico could also face military action if they do not reduce the flow of illicit drugs into the United States.
- The developments raised concerns about regional instability in Latin America. Separately, Saudi Arabia publicly accused the UAE of undermining its national security. This, coupled with the lack of progress on the peace agreement between Russia and Ukraine, continues to support the safe-haven price of gold for the second day in a row.
- On the economic data front, the S&P Global Index reported on Monday that the US manufacturing PMI remained steady at 51.8, indicating continued expansion. In contrast, the Institute for Supply Management’s (ISM) manufacturing PMI fell to 47.9 last month, from 48.2 in November, and indicated a continuing contraction in business activity.
- The data does little to calm dovish expectations, pulling the US dollar away from the nearly four-week high it reached on Monday and turning out to be another factor benefiting the non-yielding yellow metal. In fact, the Fed is expected to cut borrowing costs in March and deliver another rate cut by the end of this year.
- Traders are now looking to other US macroeconomic indicators this week, due at the start of a new month, for further signals on the path of the Fed’s rate cut. However, the focus will remain on Friday’s US Non-Farm Payrolls report, which will push the US dollar in the near term and provide new directional momentum for bullion.
Gold could rise further towards reclaiming the psychological level at $4,500
From a technical perspective, an overnight break of the 100-hour simple moving average (SMA) and subsequent move beyond the congestion area at $4445-4450 can be seen as a major catalyst for the XAU/USD rally. The Moving Average Convergence Divergence (MACD) histogram has turned positive and is up inches on the hourly frame chart, placing the MACD line marginally above the signal line near the zero mark and indicating improving momentum.
Meanwhile, the RSI stands at 68 (near the overbought zone), rising from the intermediate range and supporting strong upward momentum. A push through the 70 level would strengthen the bullish case, while failing to do so could limit gains and encourage consolidation. With the price holding above the bullish 100 hourly SMA and the MACD only positive, declines may remain shallow and the near-term bias will remain positive. The 100 hourly simple moving average is at $4,373.28 and should provide dynamic support.
(Technical analysis of this story was written with the help of an artificial intelligence tool)
Frequently asked questions about the US dollar
The US dollar (USD) is the official currency of the United States of America, and the “de facto” currency of a large number of other countries where it is traded alongside local banknotes. It is the world’s most traded currency, accounting for more than 88% of total global forex trading volume, or an average of $6.6 trillion in transactions per day, according to 2022 data. After World War II, the US dollar took the place of 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 disappeared.
The most important factor affecting the value of the US dollar is monetary policy, which is shaped by the Federal Reserve. The Fed has two missions: achieving price stability (controlling inflation) and promoting full employment. The basic tool for achieving these two goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, the Fed will raise interest rates, which helps the value of the US dollar. When the inflation rate falls below 2% or when the unemployment rate is very high, the Fed may cut interest rates, which affects the dollar.
In extreme cases, the Fed could also print more dollars and activate 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 when credit dries up because banks will not lend to each other (due to fear of the counterparty defaulting). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It has been the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy U.S. government bonds mostly from financial institutions. Quantitative easing usually leads to a weakening of the US dollar.
Quantitative tightening (QT) is the reverse process whereby the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding in new purchases. It is usually positive for the US dollar.
