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Gold price is on a corrective pullback after extending its gains to a three-month high on Friday. Since Fed’s December meeting when it hinted at slowing on its rate cuts in 2025, the precious metal has rallied by about 6%.
An environment of lower interest rates tends to bolster the non-yielding bullion. With the Fed expected to leave the rates unchanged, Treasury yields are on a decline.
As at the time of writing, the benchmark 10-year US government bond yields were at 4.55% after rebounding from the 5-week low it hit on Monday at 4.49%. Lower yields reduce the opportunity cost of holding the non-yielding bullion.
However, beyond this factor, investors are keen on President Trump’s policies and how they will impact the US economy. Indeed, it is these jitters that have heightened the demand for gold; a conventional hedge against inflation and economic uncertainties.
Even so, the rebounding of the US dollar after the stock sell-off at the beginning of the week is curbing gold price gains. The liquidity crunch caused by the DeepSeek sell-off had the US dollar drop to a 5-week low on Monday.
Trump’s tariff talks overshadow 2025’s first Fed meeting
The Fed is set to hold its first meeting of 2025 on 28th and 29th January, culminating into the announcement of its interest rate decision and FOMC statement. While the event often influences gold price movements, this month’s statement will likely yield minimal changes in the market.
Indeed, market participants have already priced in a pause on interest rate cuts as the Fed adopts a cautious stance. During their December meeting, the central bank lowered rates by 25 basis points to bring its benchmark short-term rate to 4.25% – 4.5%. Prior to the full percentage point cuts implemented in 2024, the Fed had left rates elevated for about one year to deal with high inflation.
With the progress made towards the Fed’s dual goals of price stability and maximum employment, the market expects only two rate cuts in the course of the year. In addition to relying on the latest economic data for apt decisions, the central bank will also be keen on Trump’s policies. In fact, his latest tariff talks are expected to overshadow January’s Fed interest rate decision.
The market participants are especially concerned that his policies on immigration, government expenditure, and trade may be inflationary. This includes imposing hefty tarriffs on China and other US trading partners. Besides, he appears keen on lowering immigration and enacting tax cuts.
With these huge structural shifts, the Fed will be eyeing their impact on the country’s economy. Currently, inflation remains above the central bank’s target of 2% although it is showing signs of cooling slowly.
It is this uncertainty that continues to support gold price. Investors appear to be holding on bullion as a conventional hedge against inflation and economic uncertainties.
US dollar steadies after DeepSeek sell-off
On Monday, the tech-heavy Nasdaq Composite index dropped by 3% as the market reacted to the popularity of Chinese AI model, DeepSeek. The AI chatbox, which was launched last week, has been presented as a cheaper alternative to its rivals.
Its popularity led it to be the most downloaded free app in the US; triggering a sell-off across AI-related stocks. The chaos had the US dollar drop to a 5-month before steading on Tuesday.
While the easing of the US dollar is positive for gold price, its status as a safe haven is curbing the precious metals’ gains. After momentarily plunging below it, the dollar index is back above the crucial resistance turn support zone of $107.67.
Read more: DXY index forecast ahead of key central bank decisions
Gold price forecast
The daily chart shows that the price of gold has held steady in the past few months. It has remained slightly below the all-time high of $2,800. On the positive side, gold has formed an ascending triangle pattern, a popular bullish sign.
Gold sits above the 50-day and 25-day moving averages, while the Relative Strength Index (RSI) and the MACD indicator have moved sideways. Therefore, gold will likely have a strong bullish breakout in the coming days. Such a move will point to more gains, potentially to $3,000 in the coming months.
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