Last week, XAU/USD settled at $2747.22, up $25.32 or +0.93%.
Strong dollar and government bond yields provide headwinds
The dollar index reached 104.24, marking its fourth straight week of gains, supported by strong U.S. economic data and expectations for a cautious Federal Reserve stance on interest rate cuts. With 10-year Treasury yields peaking at 4.24%, safe-haven flows into gold seem counterintuitive, as higher rates tend to dampen non-yielding assets like gold. However, the strength of the dollar and yields is being offset by uncertainty-driven demand for gold, indicating a unique market environment where traditional correlations are muted.
Key US economic data in pictures
The US economic calendar next week, with GDP and the key PCE deflator, will be crucial for setting short-term expectations for the Federal Reserve’s interest rate trajectory. A strong GDP report, expected to show 3% growth for the second consecutive quarter, could reinforce the Fed’s cautious approach and potentially dampen gold’s rally if markets see less urgency for aggressive rate cuts. However, should inflation indicators point to continued pressure, the Fed could face increasing calls for more decisive action. Meanwhile, Friday’s jobs report is expected to reflect the impact of factors such as the Boeing strike and hurricane disruptions, which could potentially influence the Fed’s view on labor market resilience and influence interest rate expectations.
Physical demand is weakening in key Asian markets
Despite the strong price development, physical demand for gold in Asia has declined. High prices have led to higher discounts in China, with Indian buyers also scaling back their purchases. This drop in demand could limit further price gains unless other catalysts, such as renewed geopolitical risks or stronger-than-expected ETF inflows, provide additional support. Nevertheless, ETF inflows have remained solid, contributing to the metal’s overall uptrend.
Market Forecast: Cautious Bullish Outlook
The short-term outlook for gold remains cautiously bullish, supported by safe-haven demand and potential dovish signals from the Federal Reserve. However, traders should take note of the key technical levels, with support at $2,604.39 and psychological resistance at $2,800, which could indicate changes in direction. Any unexpected developments in the Middle East or shifts in US economic indicators could increase volatility, but overall, gold remains well positioned for continued gains, especially as global risks persist and Fed rate cuts look increasingly likely.
Next week’s market reaction to US data and geopolitical events will be critical to the gold trend. A break above $2,760 could set the stage for a further rise towards $2,800, while a decline below $2,708.75 could put $2,604.39 on the radar. Traders should keep a close eye on these levels for clues to the metal’s resilience amid evolving global challenges.