In Tuesday’s trading session, the XAU/USD experienced a notable decline, hovering around the $2,025 level. This downward movement is primarily attributed to the robust US Dollar and elevated US yields. The resilience displayed by the US economy is exerting downward pressure on precious metals like gold (XAU). However, the downside for gold remains constrained as long as dovish sentiments towards the Federal Reserve (Fed) persist.
The Federal Reserve closely monitors Core inflation, which unexpectedly surged in December. Additionally, the labor market, a key focal point for the Fed, exhibited robust figures in the final month of 2023, marked by accelerated job creation, rising earnings, and a decline in unemployment. Despite the cautious tone maintained by Fed officials to guard against an overheated economy that may jeopardize the fight against inflation, market confidence persists in an impending easing cycle starting in March. These dovish expectations are expected to limit the downside for gold.
According to the CME FedWatch Tool, probabilities of rate cuts in March and May are currently high, exceeding 50%. As of now, US Treasury yields are on the rise, with the 2-year rate at 4.20%, the 5-year rate at 3.90%, and the 10-year yield recorded at 4%. The surge in yields has drawn attention to the US dollar, attracting foreign investors as it becomes a more appealing investment in the face of higher returns. As the market continues to assess economic indicators and anticipate Fed actions, the interplay between the strengthening US dollar and rising yields remains a pivotal factor influencing the trajectory of XAU/USD.
