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Markets Brace for Holidays as XAU/USD Retreats from $2,070 High

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  • Gold pulls back after testing $2,070 ahead of Friday’s pre-holiday close.
  • Rising investor bets of faster, more frequent Fed rate cuts squeeze Gold higher.
  • US inflation continues to cool off, Treasuries ease back amidst risk appetite recovery.

XAU/USD briefly tested above $2,070 on Friday before paring back toward the day’s opening bids. With the Federal Reserve’s (Fed) main interest rate at a 22-year high, markets are incredibly eager for the Fed to begin cutting interest rates, and receding US inflation is pinning investor hopes of an accelerated pace of Fed rate cuts in 2024.

The US Annualized Core Personal Consumption Expenditures (PCE) Price Index in November grew by 3.2% from the same time last year, easing back from market forecasts of 3.3% and declining further from the previous period’s 3.4% (which was also revised down from 3.5%).

Read More: US PCE inflation softens to 2.6% from a year ago vs. 2.8% expected

With US inflation easing back, markets are applying downside pressure to the US Dollar and bidding up Spot Gold in anticipation of Fed rate cuts that may have run too far ahead of what the Fed will be willing to execute; the Fed’s dot plot of interest rate expectations show a median forecast of 75 basis points in rate cuts through the end of 2024. By comparison, markets are currently pricing in bets of 160 basis points in cumulative rate cuts, with some particularly over-eager market participants betting on a rate cut as soon as next March.

With markets wrapping up the last full trading week of 2023 and gearing up for the holiday market break, Friday’s early action saw a notable reversal as the US Dollar pared back the day’s losses and Gold retreated back towards the day’s opening bids.

XAU/USD Technical Outlook

Spot Gold climbed over 1.10% bottom-to-top on Friday in a last-minute bull run before hitting the wall at $2,070 and reversing back toward Friday’s open near $2,050. 

Intraday action in the XAU/USD has been incredibly well-bid as of late, outpacing the 200-hour Simple Moving Average (SMA) since breaking to the topside of the moving average last week near $2,020.

A higher-lows pattern has baked into the XAU/USD on daily candles since Spot Gold bottomed out near $1,820 in early October, and long-term technical support is coming from the 200-day SMA rising into $1,960.

December’s early rally into all-time highs has left near-term Gold bids stranded in bull country, and XAU/USD will have to fall back below the $2,000 major handle before bearish patterns can begin to develop.

XAU/USD Hourly Chart

XAU/USD Daily Chart

XAU/USD Technical Levels

 

The holiday season is fast approaching, and with it comes a time for celebration, relaxation, and gift-giving among friends and loved ones. However, for the financial markets, this time of year brings a different kind of anticipation and preparation. As the markets brace for the holidays, one particular currency pair has caught the attention of investors – the XAU/USD, which retreats from its record-breaking high of $2,070.

For those unfamiliar with the XAU/USD, it is the currency pair that represents the value of gold (XAU) in relation to the US dollar (USD). Gold has long been considered a safe-haven asset, and its value often reflects the overall sentiment of the financial markets. In recent months, gold prices have been on a steady rise, fuelled by global economic uncertainty and low interest rates.

However, in mid-August, gold prices hit an all-time high of $2,070 per ounce, causing the XAU/USD pair to buck the downward trend it had been following. This surge was primarily driven by a weakened US dollar, as well as investors seeking refuge amidst the ongoing COVID-19 pandemic and its impact on the global economy. But with the holiday season quickly approaching, the markets are now bracing for potential changes in the XAU/USD’s trajectory.

Understanding the Impact of Holidays on the Markets

The holiday season brings a change in dynamics for the financial markets. Trading volume tends to decrease as traders and major financial institutions take time off for the holidays. This leads to decreased liquidity and increased volatility in the markets. As a result, many investors opt to close their positions or refrain from making significant trades during this time.

Furthermore, during the holiday season, many countries will also have shortened trading hours or even close their financial markets entirely on certain days. This can impact the XAU/USD, as movements in the USD could be limited, leading to a potential decrease in trading activity for the currency pair.

Retreat from Record Highs: What the Charts Say

As the XAU/USD retreats from its record high, it’s essential to assess the charts and trends to understand where the currency pair may be headed next. Upon reaching the milestone of $2,070, the charts showed signs of overbought conditions, leading to a natural pullback. This pullback was also influenced by positive news regarding a potential COVID-19 vaccine, causing investors to shift their focus away from safe-haven assets and back towards equities and riskier investments.

The XAU/USD then went on to break a key support level of $1,860, leading to a further decline in prices. As of mid-November, the currency pair is trading at around $1,890. This retreat from the record high has been taken as a positive sign by many traders and analysts, who believe that the XAU/USD may be consolidating before its next move higher.

Factors to Watch for in the Coming Weeks

As the holiday season approaches, there are several factors that investors should keep an eye on that could potentially impact the XAU/USD pair. These include:

1. COVID-19 Developments: With multiple vaccines on the horizon, positive news regarding the pandemic could lead to a further shift away from safe-haven assets, including gold.

2. US Dollar Strength: The USD has been on a decline for a significant part of 2020, leading to a rally in gold prices. However, any signs of the US economy recovering could lead to a potential rally in the USD and a retreat in gold prices.

3. Economic Data Releases: As with any currency pair, economic data releases from both the US and global markets can significantly influence the XAU/USD. Investors should keep an eye on indicators such as GDP, inflation, consumer spending, and employment data.

4. Trading Volume and Liquidity: As mentioned earlier, the holiday season often leads to decreased trading volume and liquidity, which can impact the volatility and direction of the XAU/USD.

Tips for Investors Trading During the Holidays

For those looking to trade the XAU/USD during the holiday season, here are a few tips to keep in mind:

1. Stay Up to Date with Events and News: Make sure to stay informed about any potential market-moving events or news that could impact the XAU/USD.

2. Be Mindful of Liquidity: With decreased trading volume and liquidity, it’s essential to be cautious and use appropriate risk management strategies to protect your investments.

3. Keep an Eye on the US Dollar: As the USD is the counter currency in the XAU/USD pair, any significant movements in the currency could impact the price of gold and the XAU/USD.

4. Consider a Variety of Trading Strategies: As the holiday season can bring increased volatility, consider adjusting your trading strategies to adapt to potential market conditions.

In Conclusion

The holiday season is a time of excitement and anticipation for many, but for the financial markets, it’s a time of preparation and caution. With the XAU/USD retreating from its record high and the holiday season approaching, investors should keep a close eye on the currency pair and be prepared for potential volatility and shifts in market sentiment. As always, it’s essential to stay informed and adapt your trading strategies to the current market conditions. With these tips in mind, investors can navigate the holiday season and potentially benefit from the movements of the XAU/USD.

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