Gold analysis: XAU/USD rebounds as Trump’s lead narrows

Gold analysis: The precious metal has started a busy week on the front-foot, after finishing last week on a downbeat note. The recovery is due in part to a weaker US dollar as investors have evidently scaled back some Trump trades – which also explains the gap seen in the EUR/USD pair we saw overnight and the subsequent buying during the European trade. But with the US election looming, things can turn rapidly intraday across financial markets. So, while gold may have started positive, it could easily turn lower, particular after it formed a couple of bearish signals last week. Still, what bearish traders need to see now is some downside follow-through later on this week to make things interesting.

How will US election impact gold?

This US election is turning out to be a rather close contest, making it highly binary. Don’t forget that we will also have a few central bank meetings this week, from the likes of the Fed and BoE. They are both expected to cut by 25 basis points regardless of the outcome of the US election. But traders are not too focused on central bank meetings this week.

Gold could end the week lower if Trump wins, as his polices are expected to boost the dollar. While this outcome seemed quite likely last week, the latest polls however suggest that the Democrats have regained some momentum in some swing states, with one poll suggesting that Harris is leading in Iowa, which was thought to be a red-leaning state.

That being said, it is fair to say that a Trump win is still the more likely outcome, which is what financial markets have been pricing in the last couple of weeks or so. Thus, the dollar could sell off sharply, if Harris surprises with a victory. The impact of a Trump win should boost the dollar, but that may depend more on the Congress composition. A clean sweep for his Republican party would be the most bullish dollar outcome, while if Trump wins but the Dems secure the house then in that case, we might see a more muted dollar response.

Don’t forget yields and US dollar

Last week saw gold finally bow to rising yields and a strong US dollar. Despite mostly soft US economic data—like the October nonfarm payrolls, third-quarter GDP, and JOLTS job openings—the dollar only softened temporarily before rebounding on Friday. As expected, the dollar’s weakness didn’t last long. Even a notable miss on the headline nonfarm payroll couldn’t prevent yields from climbing as bonds resumed their downward trend. This put pressure on major currencies against the greenback, with gold also struggling to hold onto gains by week’s end, closing near its session lows and showing bearish signals on both daily and weekly charts. Friday’s NFP data didn’t change the Fed’s likely decision to cut rates by 25 basis points this Thursday.

How gold behaves this week is likely to be influenced heavily by the direction of the US dollar, which, in turn, could be impacted significantly by the outcome of the US election.

With the election looming, a significant dollar correction appears unlikely as markets may view the weak payrolls as temporary. The dollar remains bullish in the near term, which could weigh on gold prices.

Technical gold analysis and trade ideas

Source: TradingView.com

Gold has formed a couple of bearish-looking patterns or signals last week, but we haven’t yet seen any downside follow through. Not only did the gold price break a short-term bullish trend line that was in place since October 10, the metal also formed a bearish pattern on the weekly chart too, namely an inverted hammer—which also marked its first red candle since early September. Typically, these candles appear at trend tops, though in strong markets, they can signal just a brief pause before resuming. What’s intriguing here is that the Relative Strength Index (RSI) sits at an overbought 80+, hinting that gold prices may have hit at least a temporary peak.

However, given gold trend’s strength this year, I’m not ruling out a recovery, and in any case will want to see some downside follow-through now before becoming convinced that the rally has at least temporarily ended. If the selling resumes later today, then some of the key downside targets to watch include the area of liquidity below last week’s low i.e., at $2731. The next level of support lies around $2700, followed by $2600 which is where the 2024 trend line comes into play. I’ll reassess my outlook after more price action unfolds this week, especially once the election and Fed meetings pass.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R