Gold prices decline as dollar rebounds

By: Michael Harris
Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to… read more.
on Sep 25, 2020
  • Gold prices declined to the lowest level recorded since July as the U.S. dollar gains
  • The yellow metal has gained around 24% YTD, mostly on large stimulus incentives by governments and central ban
  • XAU/USD is on the road to record the biggest monthly decline since November 2016

Gold (XAU/USD) prices declined to the lowest level recorded since July as the U.S. dollar gains on rising concerns over new Covid-19 cases in Europe and emerging doubts on additional stimulus from the Fed in the United States. 

Fundamental analysis: Higher dollar pressuring gold prices

A stronger USD makes gold prices more expensive for those who own other currencies. 

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“We are seeing a risk-off environment taking hold, which means that the dollar continues strengthening and there is a lot of pressure on gold prices in the near-term,” said Howie Lee, an economist at OCBC Bank.

The bullion has soared around 24% year-to-date, largely thanks to exceptional stimulus incentives by governments and central banks around the world in a bid to revitalize their economies.

Charles Evans, the President of the Chicago Federal Reserve said on Tuesday that the United States economy is looking at a delayed recovery from coronavirus effects and “recessionary dynamics” if Congress doesn’t provide a further fiscal incentive package.

He said that the Fed might hike interest rates before the inflation rate starts averaging 2%. 

On the other hand, the economic policymakers in the country opened the door to additional stimulus for small businesses affected by the pandemic, but offered no quick passage.

“We are also seeing a slight pessimism about U.S. fiscal stimulus and that has probably curbed inflation expectations just a little bit,” Kyle Rodda, an analyst at IG Markets.

Rodda also said the market is still hoping for policy settings changes that could result in a higher gold price in the long term. 

Technical analysis: Gold stops at support

Gold prices are currently on the way to record the worst week in six months as the yellow metal price has declined over 4.5% in the last few days. The monthly losses have now amounted to 5.3%, the biggest monthly decline since November 2016.

XAU/USD daily chart (TradingView)

Once the ascending trend line was broken at $1,950/oz, it paved the way for an accelerated plunge to an area of $1,845/oz – $1,865/oz. This is where the horizontal support line and the 200-DMA are located, therefore, this zone offers an attractive setup for Gold buyers.

A break below this zone opens the road to $1,815/oz.

Summary

Gold prices hit a 2-month low after the greenback climbed on increasing concerns over new coronavirus cases in Europe and rising doubts over further stimulus from the Federal Reserve in the U.S. 

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