Dollar demand affects the XAU/USD growth

By | May 12, 2020
Dollar demand affects the XAU/USD growth

Long-term review


Continued demand for the US dollar does not allow the XAU / USD bulls to spread their wings. Meanwhile, the market turned out to be so scared that for the first time in history it began to give out the probability of the Fed’s interest rate falling below zero. According to FOMC officials, such a move is either unlikely or impossible, but never say never.

During the week, the options market increased the chances of reducing the federal funds rate below zero by the end of December 2020, from 9-10% to 23%. CME derivatives were confident that it would go into the negative zone before the end of the year until FOMC officials began to convince investors that the Federal Reserve had other tools to deal with the situation. The head of the Federal Reserve Bank of St. Louis, James Bullard, noted that other central banks have not made much progress in this matter, and the difference in the structure of short-term lending markets in the USA, Japan, and Europe makes the use of negative rates problematic. It is obvious that not only investors and banks, but also the industry of American funds of funds can suffer. That is, the medicine may be worse than the disease itself.

It is expected that Fed Chairman Jerome Powell will raise this topic again in his speech on Wednesday, May 13. Powell previously argued that negative borrowing costs are unlikely to help the US economy.

This may support the greenback and put pressure on gold. However, the ongoing inflow of cash to precious metals-oriented stock exchanges indicates that investors are ready to deal with short-term pain and believe in a bright future for XAU / USD. According to the results of less than five months, the inflow of capital into the gold ETFs amounted to $ 14.5 billion, exceeding the result of the whole of 2019.

It should be noted that until recently the Fed leadership was skeptical about calls by the White House head Donald Trump to lower interest rates to levels in Germany and Japan so that the US economy could effectively compete with these countries. The longer the coronavirus pandemic lasts, the higher the chances of the federal funds rate falling below zero, including due to renewed criticism from the US president towards Jerome Powell and his colleagues.

Thus, the risks of implementing the dollar smile theory have not disappeared yet which enhances the likelihood of a correction of gold and allows us to count on the medium-term consolidation of XAU / USD in the range of $ 1635 – $ 1775 per ounce. At the same time, the main strategy is still to buy precious metals to reduce quotes, since the issue of escalation of trade tension between the United States and China remains open, and the risks of the second wave of the coronavirus pandemic and a long recovery in world GDP spur interest in protective assets.

Performed by Viktor Isakov,
Analytical expert
InstaForex Group © 2007-2020

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