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Gold: Election Uncertainty Fuels Dollar Weakness - Is It Enough to Spark Rebound?

Published 04/11/2024, 10:28 pm
Updated 11/03/2024, 10:10 pm
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  • Gold prices kick off the week strong, but the upcoming US election could bring volatility.
  • Dollar movements, election results, and central bank actions may shape gold’s path ahead.
  • Bearish signals in gold may unfold further—watch key levels as markets respond to political shifts.
  • Looking for actionable trade ideas to navigate the current market volatility? Unlock access to InvestingPro’s AI-selected stock winners for under $9 a month!

After finishing last week on a downbeat note, gold has started this week’s action on the front foot due in part to a weaker US dollar as investors have scaled back some Trump trades – which also explains the gap seen in the EUR/USD pair.

But with the US election now just a day away, things can turn rapidly intraday across financial markets. So, while gold may have formed a bearish signal last week, what traders need to see now is some follow-through later on this week to make things interesting.

All Eyes on US Presidential Election

The US election is turning out to be a rather close contest, making it highly binary. Don’t forget that we will also have a few central bank meetings this week, from the likes of the Fed and BoE. They are both expected to cut by 25 basis points regardless of the outcome of the US election. But traders are not too focused on central bank meetings this week.

Gold could end the week lower if Trump wins, as his policies are expected to boost the US dollar. While this outcome seemed quite likely last week, the latest polls however suggest that the Democrats have regained some momentum in some swing states, with one poll suggesting that Harris is leading in Iowa, which was thought to be a red-leaning state.

That being said, it is fair to say that a Trump win is still the more likely outcome, which is what financial markets have been pricing in the last couple of weeks or so. Thus, the dollar could sell off sharply, if Harris surprises with a victory.

The impact of a Trump win should boost the dollar, but that may depend more on the Congress composition. A clean sweep for his Republican party would be the most bullish dollar outcome, while if Trump wins but the Dems secure the house then in that case, we might see a more muted dollar response.

Gold Dropped Last Week Amid Rising Yields and US Dollar

Last week saw gold finally bow to rising yields and a strong US dollar. Despite mostly soft US economic data—like the October nonfarm payrolls, third-quarter GDP, and JOLTS job openings - the dollar only softened temporarily before rebounding on Friday.

As expected, the dollar’s weakness didn’t last long. Even a notable miss on the headline nonfarm payroll couldn’t prevent yields from climbing as bonds resumed their downward trend. This put pressure on major currencies against the greenback, with gold also struggling to hold onto gains by week’s end, closing near its session lows and showing bearish signals on both daily and weekly charts.

Friday’s NFP data didn’t change the Fed’s likely decision to cut rates by 25 basis points this Thursday. The weaker data further cemented market expectations for this cut, which now feels inevitable.

Will US Dollar Weakness Hold?

How gold behaves this week is likely to be influenced heavily by the direction of the US dollar, which, in turn, could be impacted significantly by the outcome of the US election.

But from a purely data point of view, traders are still digesting that weaker US jobs report, which showed only 12,000 new jobs versus a forecast of 100,000. While wages grew slightly more than expected (0.4% instead of 0.3%), a two-month revision adjusted August’s numbers down from 142,000 to 78,000 jobs, with minimal external factors like hurricanes affecting the data. Although some weather disruptions may have influenced October’s results, the Bureau of Labor Statistics can’t precisely measure these effects.

With the election looming, a significant dollar correction appears unlikely as markets may view the weak payrolls as temporary. The dollar remains bullish in the near term, which could weigh on gold prices.

Gold Technical Analysis and Trade Ideas

From a purely technical point of view, gold has formed a couple of bearish-looking patterns or signals last week, but we haven’t yet seen any downside follow-through.

Not only did gold break a short-term bullish trend line that was in place since October 10, but the metal also formed a bearish pattern on the weekly chart, namely an inverted hammer—which also marked its first red candle since early September.

Gold-Weekly Chart

Typically, these candles appear at trend tops, though in strong markets, they can signal just a brief pause before resuming. What’s intriguing here is that the Relative Strength Index (RSI) sits at an overbought 80+, hinting that gold prices may have hit at least a temporary peak.

However, given the gold trend’s strength this year, I’m not ruling out a recovery, and in any case will want to see some downside follow-through now before becoming convinced that the rally has at least temporarily ended. If the selling resumes later today, then some of the key downside targets to watch include the area of liquidity below last week’s low i.e., at $2731.

The next level of support lies around $2700, followed by $2600 which is where the 2024 trend line comes into play. I’ll reassess my outlook after more price action unfolds this week, especially once the election and Fed meetings pass.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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