Fed's hawkish shift meets geopolitical uncertainty: What's next for Gold?

Gold is caught between the Federal Reserve’s hawkish monetary stance and heightened geopolitical tensions around the globe. This precarious balance raises a critical question: what lies ahead for the yellow metal?

The Federal Reserve’s hawkish stance

The Federal Reserve’s decision last week to signal a slower pace of interest rate cuts for 2025 marked a pivotal moment for markets. This stance is seen as a commitment to tackling inflation, despite signs of economic slowing. The outlook has driven U.S. Treasury yields higher, with the benchmark 10-year yield reaching its highest level since May. Simultaneously, the U.S. dollar has held steady near a two-year peak, dampening gold’s appeal as a non-yielding asset.

Source: Investing.com

Gold typically thrives in low-interest-rate environments, where holding the metal incurs a lower opportunity cost. So, the Fed’s cautious approach to rate cuts has created headwinds for the yellow metal. Traders are now pricing in just 33 basis points of rate cuts for next year, compared to the two 25-basis-point cuts projected by the Fed, reinforcing the dollar’s strength and weighing on gold prices.

Geopolitical risks bolster safe-haven demand

While the Fed’s hawkish policies suppress gold’s upside, geopolitical uncertainties provide a counterbalance. In the Middle East, the ongoing conflict in Gaza took a dramatic turn this week when Israel intercepted a projectile from Yemen amid heightened hostilities. Such developments amplify fears of a broader regional conflict, boosting gold’s allure as a safe-haven asset.

The Russia-Ukraine war continues to escalate, with Russian forces making gains in the Donetsk region. President-elect Donald Trump’s suggestion for Ukraine to consider a ceasefire and cede Russian-occupied territories adds another layer of unpredictability to the geopolitical landscape. Trade war concerns also loom large, creating economic risks that could further support gold’s safe-haven status.

A balancing act for Gold

The holiday season has led to thinner trading volumes, amplifying the impact of macroeconomic data releases. Investors are closely watching U.S. economic indicators such as the Richmond Manufacturing Index for cues on the strength of the economy. Additionally, Treasury yields and the U.S. dollar remain critical factors influencing gold prices in the near term.

Gold’s current predicament highlights the interplay of opposing forces. On one hand, geopolitical tensions and trade war fears support its safe-haven appeal. On the other, elevated bond yields and a strong dollar driven by the Fed’s hawkish stance weigh on prices.

As traders navigate this complex environment, the precious metal’s next move will likely depend on two key factors. Federal Reserve policy shifts, especially signs of dovishness in response to weaker economic data, could reignite gold’s upward momentum. Meanwhile, escalating geopolitical developments or significant political shifts, such as those tied to the incoming Trump administration, could provide further support for gold.

Technical outlook: What lies ahead?

Gold prices are poised at a crossroads. While the Fed’s hawkish policies create immediate challenges, the ever-present risk of geopolitical upheaval ensures that gold retains its relevance as a safe-haven asset. For traders, this duality underscores the importance of staying vigilant and adaptable as 2025 approaches. The precious metal’s path forward will be shaped by the delicate balance between monetary policy and global uncertainty, making it a focal point for markets in the months ahead. The yellow metal’s chart tells a story of a slight positive bias with prices staying above the 100-day moving average. However, with RSI flat at the midline, the metal’s upward move could be hampered. Buyers could struggle to breach the $2,624 and $2,648 resistance levels. On the downside, the yellow metal could find support at the $2,604 and $2,587 support levels.

Source: Deriv MT5

Disclaimer:

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