Dramatic Plunge in the Gold Price – Key Factors Explained! - Forex News by FX Leaders
Gold - XAU/USD Chart

Dramatic Plunge in the Gold Price – Key Factors Explained!

Posted Thursday, June 17, 2021 by
Arslan Butt • 3 min read

During Thursday’s Asian trading session, the price of the safe-haven metal continued its losing streak of the previous session, and staged a minor recovery after GOLD recorded its most significant drop in 5 months, in the last session. However, the reason behind the recent sharp declines could be tied to the US Federal Reserve’s latest policy decision that indicated that interest rates could be raised sooner than expected. Consequently, the US dollar placed its highest level in almost two months, and contributed towards the losses in the yellow metal. Apart from this, the greenback also got some additional lift from the risk-off market sentiment, which tends to underpin the safe-haven assets, including the US dollar.

The stronger US dollar was seen as one of the key factors that kept the gold price under pressure, due to its inverse relationship with the dollar. Meanwhile, the recent selling bias surrounding the gold prices was further bolstered after Australia released strong employment data, which in turn, had a positive impact on the market trading sentiment and contributed towards the drop in the gold price. As already mentioned, the gold price was crushed overnight by a more hawkish Fed, but the declines were short-lived, as it has already staged a modest recovery in Asia. The reason could be attributed to the risk-off market sentiment, which underpinned the safe-haven demand in the market and contributed towards the modest gains in the precious metal. At the time of writing, the yellow metal prices were trading at 1,819.01, and consolidating in a range between 1,809.85 and 1,825.32.

Despite the continuous progress in the global economic performance, the market trading sentiment failed to stop its declining streak of the previous day. It remained depressed on the day, as another round of arrests in Hong Kong, and China’s military show in Taiwan keep exerting downside pressure on the market trading sentiment. Apart from this, the US and UK-backed move to push China away also played a major role in undermining the market sentiment. In addition to this, the sluggish trading mood could also be associated with the latest reports by Fed Chairman Jerome Powell, suggesting that the inflation run-up could be more consistent than previously expected, which, in turn, left a negative impact on the market mood. Thus, the prevailing risk-off mood put a safe-haven bid under the safe-haven assets, helping to limit the losses in the gold prices during the previous session.

It is worth recalling that the gold price recorded its most significant drop in 5 months during the previous session, after the Federal Reserve surprisingly brought forward its predictions for interest rate hikes into 2023. The Federal Reserve took a remarkably hawkish tone as it handed down the decision on Wednesday. Out of 18 Federal Reserve officials, 11 predict at least two quarter-point interest rate increases for 2023, in a clear sign that the central bank has started asset tapering discussions. In turn, the US dollar hit its highest level in almost 2 months, reaching $1.1984 against the euro on the day, thereby extending its gain of approximately 1% from the previous session.

On the USD front, the broad-based US dollar succeeded in extending its early-day winning streak, taking some further bids on the day, as the US Federal Reserve’s surprisingly hawkish tone in its latest policy decision tends to underpin the American currency. Meanwhile, the market risk-off mood also played a major role in underpinning the safe-haven assets, including the greenback. In addition to this, another reason for the bullish US dollar could also be associated with the previously released upbeat key economic data from the US, which indicates continued progress in the economic recovery of the United States. As a result, the prevalent upticks in the US dollar have become a key factor that has kept the precious metal prices lower, due to their inverse correlation with the US dollar.

Looking forward, the market traders will focus on the policy decisions by the Swiss National Bank and Norges Bank, which are due later in the day. Meanwhile, the Bank of Japan is set to announce its decision on Friday. In addition to this, the trade/political headlines will also be closely observed.

Gold – XAU/USD – Daily Support and Resistance

S3 1,705.54
S2 1,765.92
S1 1,788.73
Pivot Point: 1,826.29
R1 1,849.1
R2 1,886.67
R3 1,947.04On the technical front, the yellow metal, GOLD, has violated the double bottom support level of 1,825, and closing of candles below this level could extend the selling trend until the 1,807 mark. On the lower side, the violation of the 1,807 level might lead the gold prices lower, until the 1,783 level. For now, strong resistance prevails for the precious metal, at around 1,825, and a bearish trend could emerge below the same level today. Good luck!

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