Gold (XAU) Price Forecast: Dollar Strength and Eased Tensions Pressure Gold

Gold Prices Edge Lower as Geopolitical Tensions Ease and Dollar Strengthens

Gold futures traded down 0.57% early Monday as markets reacted to signs of de-escalation in Middle Eastern tensions. Israel’s recent airstrikes against Iranian missile sites, a response to recent Iranian attacks, were largely seen as a measured retaliation, sparing Iran’s nuclear and oil facilities. Both Israel and Iran tempered their rhetoric post-strikes, with Iranian Supreme Leader Ayatollah Ali Khamenei calling the attack significant yet advising against overreaction.

This cautious tone contributed to a view that immediate conflict escalation is less likely, leading some investors to re-evaluate the risk premium baked into gold prices. However, geopolitical risks remain, as non-state actors, particularly Houthi militants aligned with Iran, continue to strike oil-related targets in the Red Sea, keeping a residual risk premium in the market.

Technically, the market is short-term rangebound, which typically indicates trader indecision and impending volatility. The range is $2758.53 to $2708.76. The market is currently straddling its pivot at $2733.64. Trader reaction to this level could set the tone. A trade through $2758.53 signals a resumption of the uptrend, while a move through $2708.76 could trigger a break into $2681.46.

At 11:04 GMT, XAU/USD is trading $2730.60, down $16.62 or -0.60%.

Dollar Strength and U.S. Treasury Yields Weigh on Gold

The U.S. dollar maintained its recent strength, poised for its best month since April 2022, as traders anticipate key U.S. economic data releases this week. A stronger dollar, alongside climbing Treasury yields, adds pressure on gold prices, making bullion more expensive for foreign buyers. Yields on 10-year Treasuries rose to a three-month high of 4.26%, reflecting investor anticipation of the Fed’s potential response to the upcoming data.

While the Federal Reserve remains in a blackout period ahead of next week’s meeting, markets are pricing a high probability (nearly 95%) of a 25-basis point rate cut by November, which could provide support for non-yielding gold if realized.

U.S. Economic Data Key to Market Sentiment

Traders are closely watching this week’s data, particularly the ADP employment report on Wednesday, core Personal Consumption Expenditures (PCE) inflation data on Thursday, and October’s payroll report on Friday. October’s job report is expected to show a slowing pace, with forecasts of 125,000 jobs added versus 254,000 in September.

This slowdown could support the narrative of a cooling labor market, providing further justification for a dovish Fed pivot. Additionally, the PCE report, a preferred Fed inflation gauge, is projected to show a slight rise in core inflation of 0.3% for September. A lower reading may signal progress towards the Fed’s 2% inflation target, enhancing the appeal of gold as an alternative investment in an environment of lower rate expectations.

Asian Physical Demand Declines as U.S. Demand Rises

Demand patterns for gold are shifting as elevated prices deter Asian consumers, with Chinese gold consumption falling 11.2% year-over-year in the first three quarters of 2024, according to China’s gold association. In contrast, Western demand appears resilient as inflation concerns and geopolitical risks drive safe-haven buying.

UBS analyst Giovanni Staunovo noted that while physical demand is waning in the East, Western investment demand continues to support gold, particularly with the prospect of lower U.S. interest rates in 2024.

Market Forecast: Bullish Outlook Hinges on Fed and Inflation Data

Gold’s short-term direction will likely be influenced by this week’s U.S. economic data and any updates from the Middle East. A dovish Fed stance following signs of cooling inflation or employment could support a rebound toward recent highs, with analysts like UBS’s Staunovo forecasting gold could reach $2,900 over the next 12 months.

Conversely, strong economic data pointing to persistent inflation or robust job growth may temper this outlook, pressuring gold as yields and dollar strength persist. Traders should remain vigilant as each data release could alter expectations and provide trading opportunities amid a still-uncertain backdrop.