Gold Prices Drop Amid US Dollar Strength and Political Uncertainty, Fed Rate Cut Speculations Mount

Gold price (XAU/USD) failed to stop its previous day’s downward rally and remained well-offered around the 2,400 level, hitting an intra-day low of 2,393.

The downward trend can be attributed to the renewed strength of the US dollar, which gained momentum amid US political uncertainty as President Joe Biden may drop his re-election bid due to medical conditions.

On the other hand, the Fed is widely anticipated to start reducing interest rates in September, which could cap gains in the US dollar and help gold prices limit their losses.

KENNEDY DOLLAR
The main visual difference between the Kennedy dollar and the US dollar was the lettering on the top of the bill.
On the Kennedy dollar was written "THE UNITE STATES NOTE".
On the other hand, the FED dollar (as it is still used today) reads "FEDERAL RESERVE… pic.twitter.com/F3jdajj7DI

— nikola 3 (@ronin19217435) July 21, 2024

US Dollar Strengthened Amid Political Speculation and Economic Data, Fed Rate Cut Expectations Rise

On the US front, the broad-based US dollar regained its positive traction and edged higher along with bond yields amid speculation that the Republican Party will win the upcoming Presidential elections.

Expectations for Donald Trump’s return as President increased after an assassination attempt on him.

Additionally, the possibility of President Joe Biden dropping his re-election bid due to medical conditions has further fueled the chances of a Trump victory. Trump’s favouring of protectionist trade policies boosts the US dollar’s appeal.

On the other hand, gains in the US dollar could be limited as expectations for the Fed to normalize policy in September rose. Policymakers are slightly more confident that inflation is nearing the 2% target but still seek more soft inflation data before lowering rates.

Market speculation for Fed rate cuts increased after June’s Consumer Price Index (CPI) showed faster-than-expected deceleration in both headline and core CPI. Additionally, monthly headline inflation fell for the first time in over four years.

On the data front, the unemployment rate rose to 4.1% in June, the highest since November 2021. For the week ending July 12, initial jobless claims were higher than expected at 243,000, compared to estimates of 230,000 and the previous figure of 223,000.

Therefore, the stronger US dollar and rising bond yields, driven by expectations of a Republican win and Trump’s policies, could weigh on gold prices, as a stronger dollar typically dampens gold’s appeal.