The US Federal Reserve is expected to keep interest rates unchanged at its monetary policy meeting next week, but analysts say the gold market is more focused on the actions of the newly elected US President than on short-term "hawkish" signals.
The surge came after President Donald Trump spoke at the annual World Economic Forum in Davos, Switzerland, calling on global central banks to cut interest rates.
“I would call for interest rates to be cut immediately. And similarly, they should be cut all over the world,” he said.
Some economists note that Mr. Trump’s comments are inconsistent with the Fed’s policy direction, which has made clear that it is in no rush to cut interest rates.
In recent weeks, the Fed has warned consumers about rising inflation risks in an effort to shorten the current easing cycle.
Ahead of this week's monetary policy meeting, markets expect the Fed to keep interest rates unchanged.
Naeem Aslam, chief investment officer at Zaye Capital Markets, said he does not expect the Fed's hawkish stance to last.
“Trump has made it clear that he wants to lower interest rates, which could lead to a conflict between Trump and the Fed,” he said. “This is what traders are paying attention to, and gold prices are likely to remain high.”
Ole Hansen, head of commodity strategy at Saxo Bank, said the disagreement between Mr Trump and the Fed is creating uncertainty, which is benefiting gold as a safe-haven asset.
Hansen added that with gold's renewed bullish momentum, $2,800 an ounce could be just the beginning.
Analysts also pointed out that Mr. Trump's comments highlight the ideal environment for gold. Not only does he want to lower interest rates, he also supports tax cuts, which could boost the economy and potentially push inflation higher.
Trump’s monetary policy comments, along with uncertainty over tariffs on China, have also led to significant weakness in the dollar, according to Kitco analyst Neils Christensen. The U.S. dollar index has fallen below its initial support level of 108. The dollar has fallen nearly 2% against a basket of currencies and is currently trading at a five-week low of 107.46.
Lukman Otunuga - Managing Market Analyst at FXTM - said the inflation threat is likely to force the Fed to maintain a "hawkish" stance in the near term.
“Inflation concerns amid aggressive tariffs could cap gains in gold – especially if this leads to a slowdown in Fed rate cuts. Looking at the chart, gold is in an uptrend, with the next psychological level at $2,800 an ounce. The Fed’s decision this week could shape the outlook for gold in the coming weeks,” he said.
Meanwhile, the dollar could benefit from the interest rate differential. However, the Fed meeting is not the only important event next week. The European Central Bank (ECB) is also scheduled to announce its interest rate decision on Thursday, with markets expecting a rate cut.
“With data largely in line with or below the ECB’s December forecast, this meeting should result in a simple 25bp cut,” said currency analysts at TD Securities. “Near-term market dynamics reflect long positioning and valuations, which we believe will provide an opportunity to re-enter fresh USD longs.”
