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Gold prices transform into a new economic trap

24th Jan 24 11:09 am

The price of gold (XAU/USD) declined during morning trading today, Wednesday, reaching $2025.

The price remains confined within a narrow trading range, while traders seek to understand more about the timing of the Federal Reserve’s interest rate cuts.

Here, I believe the focus will continue on the significant U.S. economic calendar this week, starting with the Purchasing Managers’ Index (PMI) today, followed by the fourth-quarter Gross Domestic Product (GDP) on Thursday, and the Personal Consumption Expenditures (PCE) price index on Friday. These releases could lead to highly volatile price fluctuations upon their release.

Recently, investors have lowered their expectations for near-term monetary easing by the Federal Reserve following data indicating the resilience of the flexible U.S. economy. Several Federal Reserve officials last week emphasized the need for more inflation data before making any judgment on interest rates.

This, in turn, helps the U.S. dollar to stay above its highest level since December 13, breaking through at 103.70 points yesterday, which is a key factor directly impacting the price of gold. However, geopolitical tensions, along with concerns about economic slowdown in China, could provide support for the strength of gold as a safe haven.

From my perspective, recent U.S. data suggests that the economy is in good shape, giving the Federal Reserve greater room to keep interest rates high for a longer period, acting as a negative pressure on the price of gold. Current market expectations indicate a significant chance of the Federal Reserve making its first interest rate cut in May, which was anticipated in March.

In the past hours, the U.S. military targeted three facilities used by the Islamic Resistance in western Iraq in direct response to a series of recent attacks on U.S. sites and bases, increasing the risk of escalating tensions in the Middle East, a positive factor for gold prices in the short and medium term.

It seems that investors are also hesitant to set strong directional expectations and prefer to wait and monitor the markets before the key U.S. economic data. These crucial data will play a major role in influencing market expectations regarding the Federal Reserve’s future policy actions, which, in turn, will drive demand for the U.S. dollar and weaken the price momentum in the short term for gold.

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