Gold Prices Stuck in Negative Territory! Strong Dollar Surge Drowns Out Weak Risk Tone

Gold price attracts some intraday sellers amid a modest USD rebound from a multi-week low.

Fed rate cut bets and US fiscal concerns might cap the USD and lend support to the commodity.

Rising geopolitical tensions and trade-related uncertainties should support the XAU/USD pair.

Gold price (XAU/USD) maintains its offered tone below a four-week top touched earlier this Tuesday, though it has managed to rebound slightly from the daily low set during the first half of the European session. The intraday slide is sponsored by the emergence of some US Dollar (USD) buying, which tends to undermine demand for the commodity. However, a combination of factors holds back traders from placing aggressive bearish bets around the precious metal.

Investors seem convinced that the Federal Reserve (Fed) will cut interest rates further amid signs of easing inflation in the US, which should cap the USD and support the non-yielding Gold price. Moreover, investors remain on edge amid concerns about the worsening US fiscal situation, persistent geopolitical risks, and rising US-China trade tensions. This should further contribute to limiting losses for the safe-haven XAU/USD ahead of the US JOLTS Job Openings data.

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 worlds 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 Feds 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 Feds 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.

Daily Digest Market Movers: Gold price remains depressed amid stronger USD; downside potential seems limited

The US Dollar rebounds from a six-week low and prompts some profit-taking around the Gold price on Tuesday, following the previous day's move higher. Most Asian equity markets took positive cues from the stronger overnight close on Wall Street and exerted additional pressure on the safe-haven precious metal.

Investors, however, remained largely on edge in the wake of rising US-China trade tensions and geopolitical risks. US President Donald Trump lashed out at China over the weekend and accused the latter of violating a preliminary tariff agreement, reviving fears of a trade war between the world's two largest economies.

Earlier last week, Trump announced that he is going to double tariffs on steel imports from 25% to 50%. Meanwhile, the Trump administration is reportedly urging countries to present their most favorable trade proposals by Wednesday in an effort to speed up discussions before reciprocal tariffs come into effect on July 8.

A second round of direct peace talks between Ukrainian and Russian delegations in Istanbul on Monday ended without a major breakthrough. Moreover, Ukrainian President Volodymyr Zelenskyy said the surprise drone attacks over the weekend were a success and that it will continue if Russia doesn't halt its offensive.

The developments have heightened geopolitical risks, which might continue to weigh on investors' sentiment and offer some support to the safe-haven XAU/USD. Furthermore, bets for at least two 25 basis points interest rate cuts by the Federal Reserve in 2025 should limit losses for the non-yielding yellow metal.

Comments from several Fed officials in recent days have brought some clarity to the outlook for interest rate cuts in 2025. In fact, Fed Governor Christopher Waller said on Monday that rate cuts remain possible later this year even with the Trump administration's tariffs likely to push up price pressures temporarily.

Moreover, Chicago Fed President Austan Goolsbee noted that interest rates can come down over 12-18 months. In contrast, Dallas Fed President Lorie Logan struck a cautious tone and said that the policy is well positioned to wait and be patient, and the risk is if higher short-term inflation expectations become entrenched.

Nevertheless, investors seem convinced that the Fed will stick to its easing bias amid signs of further easing of inflationary pressure in the US. Adding to this concerns about the US fiscal health could revive the “sell America” theme, which, in turn, warrants caution for the USD bulls and should benefit the commodity.

Traders now look forward to the release of the US JOLTS Job Openings data, which, along with speeches by influential FOMC members, will drive the USD and the XAU/USD pair. The focus, however, will remain on the US monthly employment details, or the Nonfarm Payrolls (NFP) report on Friday.

Gold price bulls have the upper hand while above the $3,325 horizontal resistance breakpoint

From a technical perspective, the overnight breakout through the $3,324-3,326 hurdle and a subsequent strength beyond the $3,355 area was seen as a key trigger for the XAU/USD bulls. Moreover, oscillators on daily/hourly charts are holding comfortably in positive territory and suggest that the path of least resistance for the Gold price is to the upside. Hence, any subsequent slide below the $3,355 area could be seen as a buying opportunity and remain limited near the $3,326-3,324 resistance-turned-support. Some follow-through selling, however, could make the commodity vulnerable to weakening further below the $3,300 mark and testing the $3,286-3,285 horizontal support.

On the flip side, bulls might now wait for a move beyond the $3,400 round figure before positioning for a move toward the next relevant resistance near the $3,430-3,432 area. A sustained strength beyond the latter should allow the Gold price to retest the all-time peak touched in April and make a fresh attempt to conquer the $3,500 psychological mark.