Gold prices have been consolidating after retreating from the $3,400 region, having touched two-week highs earlier this week. The pullback comes as persistent demand for the US Dollar weighs on the precious metal. However, concerns about the independence of the US Federal Reserve (Fed) and escalating trade tensions between the US and China could provide a cushion for gold’s downside, supporting its price amidst a broader market uncertainty.
Technical Analysis of XAU/USD
Gold has faced challenges in maintaining its bullish momentum, but the technical outlook remains largely positive, provided certain levels hold. The 14-day Relative Strength Index (RSI), which is currently hovering around 55.50, remains above the neutral 50 level, signaling that the bullish bias is still intact. As long as the RSI remains above this key level, gold retains the potential for further gains.
Moreover, the crossover of the 21-day Simple Moving Average (SMA) above the 50-day SMA earlier this week signals a continuation of the upward trend, known as a “Bull Cross.” This pattern suggests that gold may have further room to appreciate if the current consolidation phase resolves positively.
The immediate resistance for gold is located at the $3,400 level. A sustained break above this level would likely trigger further upside toward the next resistance zone around $3,440. On the downside, the 21-day and 50-day SMAs near $3,350 provide initial support. A move below this level would be bearish, and gold could test the next significant support zone at the 100-day SMA, currently around $3,328.
Key Levels to Watch:
- Immediate Resistance: $3,400
- Next Resistance: $3,440
- Support: $3,350 (21-day and 50-day SMA)
- Strong Support: $3,328 (100-day SMA)
The technical structure suggests that gold has not closed below the 100-day SMA since December 31, 2024, highlighting the importance of this support level in maintaining a positive medium-term bias.
Fundamental Drivers: Political and Economic Uncertainty
The rally in gold comes amid ongoing political tensions, notably the feud between US President Donald Trump and the Federal Reserve. Trump’s recent announcement that he intends to fire Fed Governor Lisa Cook over alleged mortgage fraud has created additional uncertainty in the markets. Although Cook has resisted the dismissal, asserting that the president does not have the authority to remove her, this ongoing political interference is fueling concerns about the Fed’s independence, which in turn is providing safe-haven support for gold.
In addition to the political turbulence, gold’s outlook is supported by expectations of a potential interest rate cut from the Fed. Following statements from Fed Chairman Jerome Powell and the ongoing market sentiment, investors are pricing in a high likelihood of a rate reduction in September. This dovish stance from the Fed would lower the opportunity cost of holding gold, which yields no interest, further supporting the metal’s price.
On the other hand, Trump’s aggressive trade stance and tariff threats could undermine the attractiveness of US assets, including the US Dollar. The US president’s latest threat to impose a 50% tariff on imports from India could escalate trade tensions and stoke concerns over global economic growth, which historically benefits gold as a safe-haven asset.
Key Developments to Watch:
- Fed Independence Concerns: Trump’s attempts to interfere with the Fed’s governance structure could weaken confidence in the US Dollar, adding support to gold.
- Rate Cut Expectations: The heightened probability of a rate cut in September would likely benefit gold, reducing the opportunity cost of holding the metal.
- Trade Tensions: Trump’s tariff threats, especially those targeting China and India, could further dampen market sentiment and drive investors towards gold.
Market Outlook: Focus on Inflation Data
While gold is supported by political and economic uncertainties, the direction of the US Dollar will play a critical role in shaping the precious metal’s future price action. If the US Dollar continues to exhibit strength, it could cap gold’s gains, despite the favorable fundamentals. Conversely, a renewed downturn in the Dollar could trigger further upside in gold.
Attention will now shift to key US economic data, particularly Friday’s release of the core Personal Consumption Expenditures (PCE) Price Index, which is the Federal Reserve’s preferred inflation gauge. Any deviation from expectations could influence the Fed’s decision-making process and potentially shift market sentiment toward either tightening or further rate cuts. Gold’s price is likely to react strongly to this data, as it will provide fresh insights into the Fed’s monetary policy stance.
Conclusion
Gold’s current consolidation represents a critical juncture in its ongoing bull market. With political risks surrounding the US Federal Reserve, growing expectations for rate cuts, and increased global economic uncertainty, gold remains a key safe-haven asset. The technical outlook supports further upside, especially if gold can maintain its position above key support levels. However, the performance of the US Dollar and upcoming economic data, particularly inflation figures, will likely determine the precious metal’s next directional move. Gold’s resilience amidst these risks underscores its continued appeal as a hedge against economic and political uncertainty.
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