Gold prices are struggling to find a clear direction amidst conflicting signals in the market. The uncertainty stems from doubts surrounding the Federal Reserve’s potential interest rate cuts and the upcoming release of the US Personal Consumption and Expenditure (PCE) Price Index data on Friday. Traders are holding back, waiting for more clarity on the Fed’s stance before making significant moves.

Last week, the Fed hinted at a plan to cut interest rates by 75 basis points in 2024, which initially boosted gold prices. However, positive US economic indicators, such as Tuesday’s better-than-expected Durable Goods Orders, suggest a robust economy, potentially keeping interest rates higher for longer. This has led to elevated US Treasury bond yields, strengthening the US Dollar and capping gains for gold.

In the midst of this, geopolitical tensions remain a concern, with Russia intensifying attacks on Ukrainian energy infrastructure and Iran-backed militants staging attacks in the Gulf of Aden and the Red Sea. These events contribute to market risk aversion, supporting the US Dollar further.

Technically, gold prices are in a consolidation phase, with bullish momentum above the $2,164-2,163 support zone. Oscillators on the daily chart suggest a potential upside breakout, significantly if prices surpass the $2,200 mark. However, a significant decline below key support levels could trigger aggressive selling and lower prices towards $2,100.

In summary, gold prices are influenced by various factors, including Fed policy uncertainty, economic data releases, geopolitical tensions, and technical indicators. Traders are cautious, awaiting more precise signals before committing to new positions.


What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.

By Admin

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