The continued pressure on the US dollar due to expectations that the US Federal Reserve will cut interest rates in 2024 is helping bulls maintain the recent record-breaking pace of gains. Recently, gold prices (XAU/USD) jumped to a new all-time high of $2,140 per ounce before settling around $2,076 per ounce at the time of writing.
According to trading data, the US dollar ended its worst year since the start of the pandemic as Wall Street markets boosted bets that the Federal Reserve is set to cut US interest rates in 2024. Therefore, after being affected by false starts calling for an end to the Federal Reserve's rate-hiking cycle, Bloomberg's dollar index fell 2.7% this year, the biggest annual decline for the US currency since 2020.
Meanwhile, much of the decline in the fourth quarter was due to growing bets that the Federal Reserve will ease policy next year as the US economy slows. This weakens the appeal of the dollar as other central banks may keep interest rates higher for longer. Currently, Swap traders are considering a cut in US interest rates by at least 150 basis points, with the first cut coming in March. Moreover, this is up from less than 100 basis points in mid-November and double what policymakers expected at their last meeting. Among speculative traders, dollar positions have become more bearish since the Fed's December meeting.
Commenting on that, “Markets are positioned for a ‘Goldilocks’ scenario where the Fed will cut interest rates enough to stimulate the economy without reigniting inflation pressures,” said Amanda Sundstrom, an expert at SEB AB in Stockholm. Also, “This is what is driving the dollar’s performance.” She added that the dollar's weakness is likely to continue in 2024 with weak US data, but not enough to stimulate risk aversion to buy safe haven assets such as the US currency.
However, the dollar's recent losses suggest that there is room for at least a temporary recovery. The Bloomberg Dollar Spot 14-day Relative Strength Index (RSI) recently traded below 30, a signal to some that the currency is now oversold and preparing for a reversal. However, the dollar may move in the run-up to the US presidential election in November, according to Koji Fukaya, an associate at Market Risk Advisory Co. in Tokyo. Particularly, he said that the presence of Donald Trump as a candidate, could cause political unrest and lead to currency fluctuations.
The Bloomberg dollar gauge was steady last Friday on the last trading day of the year, while Treasury bonds ended the holiday-shortened session on a mixed note. Obviously, the dollar's decline contrasts with the pound sterling, which had its best year since 2017, and the franc, which recorded its strongest annual performance since 2010.
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The overall trend for gold prices (XAU/USD) remains up and will not be broken without a return to the area around $2,000 or lower. Technically, this could happen if the US dollar recovers strongly in response to the announcement of the content of the latest meeting minutes of the US Federal Reserve, along with better-than-expected results for US job figures at the end of the week. Therefore, if the US dollar does not gain positive momentum from these data and events, bulls may find the opportunity to break through the resistance of $2,100 per ounce again. Considering that these gains for gold are enough to push all technical indicators towards strong overbought levels, it is no wonder that profit-taking selling may occur at any time.
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