XAU/USD: Dollar vs. Gold. Near-Term Prospects

[Ben Graham]

*) see also: InstaForex Trading Indicators for XAU/USD

In a context of reduced trading volumes and amid the dollar's recovery, the price of gold and the XAU/USD pair are declining in the first half of Monday's trading.

The XAU/USD pair was trading near $4,458, moving towards the nearest significant support level of $4,420 (EMA200 on the 1-hour chart), which separates the short-term bullish market from the bearish one.

Current Trends in the Dollar Market

The dollar is gradually recovering after a period of relative weakness driven by changes in the Federal Reserve's policy. Employment and inflation figures continue to positively influence the currency, providing it with some stability. After a prolonged decline, the dollar index (USDX) has found technical support near one of the key strategic levels, separating the global bullish USDX market from the bearish one—97.60 (EMA144 on the monthly chart).

However, the dollar's growth should still be viewed as corrective within the ongoing bearish trend. According to the CME FedWatch data, the market is pricing in a high probability of maintaining the rate at the January FOMC meeting (82%) and a low probability (18%) of a 25-basis-point cut. This indicates that expectations for further rapid tightening have softened, and the market is already accounting for gradual rate reductions in the future.

The prospects for the dollar's further growth depend on several important factors:

• The dynamics of inflation and the U.S. labor market
• The outcomes of FOMC meetings could clarify the central bank's future steps.
• The global economic situation, especially in Europe and Asia, is influencing international trade and capital flows.

Short-Term Outlook

• Base Scenario (Most Likely): Moderate recovery of the dollar amid technical adjustments, with the Fed maintaining rates without strong signals for further rapid cuts. The strengthening of the dollar will be limited by market expectations of rate reductions later.
• Rapid Strengthening of the Dollar: If data on inflation and the labor market worsen expectations for easing monetary policy (i.e., if inflation accelerates), the market might revise the probability of easing, and the dollar could gain strong support.
• Weakening of the Dollar: If the FOMC minutes and subsequent comments from regulators signal readiness for earlier and deeper rate cuts, or if the U.S. economy sharply slows, the dollar could decline.

Gold Prices and Global Factors

The price of gold is currently declining in a low-liquidity environment, influenced by the strengthening dollar and rising expectations of global political changes.

Key reasons for the current position of gold:

• Technical Correction: Gold has pulled back from a record high of $4,550.00 on low volumes—this is a typical technical correction after reaching overbought levels.
• Strengthening Dollar: Traditionally, gold loses its appeal when the U.S. dollar strengthens, as the need for alternative inflation hedges decreases.
• Global Political Events: Reports of a potential resolution to the conflict in Ukraine have led to decreased demand for safe-haven assets like gold (over the weekend, following a meeting with Zelensky, Donald Trump expressed confidence in the "nearness of the end of the war in Ukraine").
• Inflation: Even amid high inflation, gold struggles to compete with more attractive investments that offer returns in dollar terms.

Nonetheless, the price of gold remains near historic highs, reflecting deep structural problems in the global economy and ongoing uncertainty in several regions of the world.

Gold Scenarios for the Coming Weeks

• Base Scenario: A brief technical correction towards support levels of $4,444.00 (EMA144 on the 1-hour chart), $4,420.00 (EMA200 on the 1-hour chart) – $4,400.00. Further growth could follow if geopolitical tensions rise again or if real rates continue to decline.
• Bearish Scenario: Confirmation of a global improvement in risk prospects (peace resolution, dollar growth) and a sustained increase in real rates could continue to exert pressure, leading to further corrections towards $4,254.00 and $4,200.00 – $4,185.00.
• Bullish Scenario: Escalation of geopolitical tensions, unexpectedly weak U.S. economic data, or accelerating inflation could push gold to new highs.

What to Monitor as a Trader or Investor

• FOMC December Meeting Minutes (publication on Tuesday at 19:00 GMT) and subsequent comments from Fed members— to understand the internal balance and pace of easing.
• Employment Data (on Friday, January 9) and inflation data (PCE, CPI) in the U.S.—key for rate expectations.
• Dynamics of Real Interest Rates and Treasury Yields.
• News related to Ukraine and geopolitics, as well as flows into gold ETFs and positioning on COMEX.
• Technical Levels: The resistance zone of $4,500.00 – $4,550.00 and the support zone of $4,420.00 – $4,400.00 are important in this review.

Conclusion

The dollar is showing a technical recovery after a period of weakness, but its potential is limited by expectations of further Fed rate cuts. Gold is correcting from record highs under pressure from the strengthening dollar and hopes for de-escalation in Ukraine, but it remains sensitive to real rates, inflation, and geopolitical risks.

The prospects for the dollar and gold are closely tied to developments in the global economy and to central bank policies. Despite the current positive signals for the dollar, long-term economic and political factors may alter the balance of power in the global financial market. Investors and traders should closely monitor key indicators and events to make informed decisions regarding their investments in dollars and gold.

The material has been provided by InstaForex Company - www.instaforex.com