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Gold Continues to Decline, Euro Rises Amid US Election Uncertainty

Published 11/05/2024, 03:11 AM
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Gold Awaits the US Election Results

Gold Futures continues to decline after reaching new highs on Monday (NASDAQ:MNDY). After rebounding from $2,790, its price has fallen by more than $50.

XAU/USD has been moving within a narrow range over the past few days. Investors have been hesitant to open positions before the US presidential election and the upcoming Federal Reserve (Fed) meeting later this week. Based on polling, Republican nominee Donald Trump and Democratic nominee Kamala Harris appear to be running closely matched, creating uncertainty for investors. According to analysts, gold prices are expected to rise regardless of which candidate becomes president, as both have policies to increase spending rather than reduce it.

Also, the Fed interest rate decision this Thursday and the following Press Conference with comments from Chairman Jerome Powell will affect the Forex market. According to the CME's FedWatch Tool, markets anticipate a 25-basis-point (bps) decrease this week, the second rate cut this year. Still, the regulator may decide to leave the base rate unchanged at the current level, but it's unlikely to impact the market significantly.

Currently, XAU/USD is expected to continue moving in a narrow range of $2,730–$2,745, awaiting the US election, with no increased volatility anticipated. The upcoming election results and Fed interest rate decision create uncertainty for markets.

Euro Rises as US Election Uncertainty Weighs on the Greenback

The euro (EUR/USD) gained 0.4% against the US dollar (USD) during a very volatile trading session on Monday.

Initially, EUR/USD rallied above 1.09000 but later lost most of the gains, yet still managed to finish the day on a positive note. Traders attribute yesterday's price action in the Forex market to repositioning ahead of the US presidential elections, which begin on Tuesday.

"The Trump trade is unwinding. We've seen a big pullback in the likelihood of a Republican sweep as implied by prediction markets and polling," said Karl Schamotta, chief market strategist at Corpay.

Speculation that former Republican President Donald Trump is more likely to win the presidential election than Democratic Vice President Kamala Harris has led investors to flock to the US dollar. This is because Trump's policies on tariffs and immigration are seen as inflationary, which would pull US Treasury yields higher and force the Fed to pursue a tight monetary policy.

Given that traders have mostly priced out Harris's win, the US Dollar Index (DXY) is now falling as her chances have improved. The currency market will likely experience more volatility in the coming 24 hours as election results will be released. Fundamentally, there is only a minor divergence in monetary policy expectations between the European Central Bank (ECB) and the Fed. Both central banks are expected to deliver roughly 75 basis points (bps) worth of rate cuts by mid-March 2025.

EUR/USD was essentially flat during the Asian and early European trading sessions. Today, the most important event will be the US election. The first results of the Congressional and Presidential elections will appear at 11:00 p.m. UTC and immediately affect the market. If Trump wins and Republicans gain control of Congress, the DXY will rally while EUR/USD will experience a large downward correction. Conversely, if Harris wins and Democrats gain control of the House of Representatives, USD will almost certainly plunge sharply, pulling the euro and other currencies higher. 

Australian Dollar is Ready to Reverse

The Australian dollar (AUD/USD) gained 0.39% on Monday as market participants were preparing for the Reserve Bank of Australia's (RBA) interest rate decision.

The central bank's position on monetary policy remains unchanged—RBA issued a statement supporting its previous comments. The regulator continues to emphasize that underlying inflation remains too high. However, the RBA highlighted its latest forecasts regarding monetary policy in its Statement on Monetary Policy. The regulator states that it ‘doesn't expect inflation to return to the middle of the target range until 2026’.

The guidance section of the statement further supports this view, with RBA noting that the November monetary policy forecast indicates it will take some time before inflation is consistently within the target range and approaches the middle point. Despite this, the RBA didn't rule out the possibility of restrictive monetary policy. Overall, the market expects the first rate reduction in May next year. However, these expectations have shifted since the middle of this year.

AUD/USD continued to grow during Asian and early European trading hours. The US ISM Services PMI report data will come out today at 3:00 p.m. UTC and may affect the pair. A higher-than-expected number should be taken as bearish for the AUD/USD, while softer data may support the pair. Also, the first results of the US elections will start coming out at 11:00 p.m. UTC, impacting the market. Trump's victory may bring a big downward correction in AUD/USD, but the pair may have a bullish momentum if Harris wins.

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