Gold fluctuates amid dollar strength: what’s next for prices?

Gold prices were steady on Tuesday as the yellow metal failed to capitalize on the previous session’s gains. 

Gold’s upside has been capped by a rising dollar. A stronger dollar makes the commodity more expensive for overseas buyers. 

The dollar had fallen briefly in the last trading session, but gained again on Tuesday, weighing on investors’ sentiments. 

“A firmer US Dollar (USD), bolstered by expectations for a less dovish Federal Reserve (Fed), is seen as a key factor undermining demand for the commodity,” Haresh Menghani, editor at FXstreet, said in a report. 

The greenback had also risen after US President-elect Donald Trump threatened to impose “100% tariffs” on the BRICS bloc, warning them against pursuing an alternative to the US currency. 

At the time of writing, the February gold contract on COMEX was $2,660.11 per ounce, largely unchanged from the previous close. 

Economic data awaited

“With a new month starting, traders know that it is best not to jump the gun or make any hasty decision as a plethora of economic data is on the horizon, which could have a substantial impact on the near-term volatility of gold,” Kitco.com said in a report. 

This week, crucial labour data from the US will be released. The ADP employment report and the non-farm payroll data will be released later this week, which will provide a crucial insight into the US economy’s current health. 

An unexpectedly strong data could further support the dollar, and weigh on gold’s allure as an effective investment tool. 

Meanwhile, a slew of US Fed officials are scheduled to speak later this week. Among them, Fed Chair Jerome Powell would be the most notable name. 

Powell will speak on Wednesday, just weeks ahead of the US central bank’s policy meeting. 

Less-dovish Fed?

The recent uncertainty about interest rate cuts by the US Fed has weighed on gold prices. 

Last week, minutes from the Fed’s last policy meeting indicated that the officials were divided on the subject of rate cuts. 

“The minutes, which were released last week, provided the market with limited clarity on the Federal Reserve's upcoming actions with respect to interest rates,” Kitco.com said. 

Increasingly, the precious metals market is reliant on the incoming economic data to assess the policy stance of the Fed. 

Moreover, Trump’s expansionary policies and tariff hikes are expected to accelerate inflation and make things pricier. This would lead to a slowdown in the pace of rate cuts, and the Fed would be forced to keep them at an elevated level for a longer period. 

Higher rates weigh on investors’ demand for gold as it is a non-yielding metal, unlike bonds. 

According to the CME FedWatch tool, traders have priced in a 75.4% probability of the Fed cutting interest rates by 25 basis points at its December meeting. 

Outlook for gold prices

According to Kitco.com, despite the recent volatility in prices, the medium-to-long-term outlook for gold remains “compelling”. 

Robust demand from global central banks supports gold prices, while protectionist policies, trade disputes, and geopolitical tensions also increase the safe-haven appeal of the yellow metal. 

“The sell-off in both gold (and silver) looks like another knee-jerk reaction to the jump in the US dollar...this is more to do with euro weakness than anything else as investors react to the deteriorating political situation in France,” Morrison said. 

Morrison added:

Meanwhile, analysts at Kitco.com see a short surge in gold to above $2,700 per ounce if the Fed cuts rates by 25 bps. 

Also, the market is likely to see some volatility in the upcoming weeks, especially with the uncertainty over the economic state of the US and Trump’s policies.