Gold Faces Headwinds Amid Changing Rate Cut Odds

The FOMC is expected to cut its interest rates, but following the conclusion of the election, markets have adopted a fresh perspective on economic data and its implications for the trajectory of future monetary policy.​

What the Election Changed

Markets reacted positively to the news that Donald Trump secured a second term as President of the United States. Equity indices, the US dollar, and cryptocurrencies reached new record highs. The Republican Party performed strongly in the Senate elections, which would facilitate the new Trump administration's ability to implement policies related to trade and appointments to government positions. However, the outcome in the House of Representatives was less clear, with a razor-thin majority potentially going to either major party, a situation that might not be resolved for weeks. A Republican majority in the House would help reduce uncertainty around the passage of funding bills, such as addressing the debt ceiling, which will be reinstated at the end of December and could become a contentious issue if Congress is divided.

As for the Fed, Trump will not assume office until 20th January, implying that any changes in fiscal policy will occur in the medium to long term. Meanwhile, the market remains focused on recent data in the short term. Just before the election, there was a near-unanimous consensus that the FOMC would cut interest rates by 25 basis points, a view further reinforced after the voting concluded. The focus now turns to forward guidance, with the market pricing in almost a 75% chance of another 25 basis point rate cut in December. However, these odds have been declining, and investors will closely monitor any modifications in the Fed's rhetoric to evaluate if there is a need to reassess the rate outlook.​

The Economic Outlook

The economic situation has improved since the previous meeting, where the FOMC unexpectedly cut interest rates by 50 basis points. The rhetoric also set the stage for another rate cut at the upcoming meeting, implying that the Fed aimed to address weakness in the labour market after a couple of months of underwhelming non-farm payroll (NFP) figures. Since then, Q3 GDP growth has been relatively strong, and the number of job seekers has remained low. However, markets largely dismissed October's small job growth numbers as the figure was highly distorted by two hurricanes, labour strikes, and an unusually low response rate. Inflation is slowly moving towards the Fed's target, giving the impression that the economy is experiencing a soft landing and that future rate cuts would likely remain modest.

Gold was one of the casualties of the election, dropping 2.8%, the biggest daily loss in five months, as a stronger dollar caused the yellow metal to decline. Additionally, markets trimmed expectations for long-term easing, with a subsequent rise in yields making gold less attractive. However, geopolitical tensions have not abated, and while gold could be under pressure due to interest rate rhetoric, particularly if the Fed provides less dovish signals on Thursday, it might still have support as a safe haven during the transition period of Trump's return to the White House.​

Gold Could Head to $2600

Gold might have formed a head-and-shoulders (H&S) pattern, indicating a potential continuation of the decline towards $2600 as it closed below the short-term golden ratio support of $2675. Maintaining this level could increase the likelihood of a larger H&S formation, with the right shoulder situated at $2685. However, a breach below the support might lead prices to decrease towards $2550 and the major support level of $2485. Conversely, if gold remains above $2650 or the swing low at $2600, prices could accelerate towards the peak of $2800 if bulls can push prices above the 50% Fibonacci retracement level at $2700.​

Source: SpreadEx / Spot Gold

Key Takeaways

The Fed is expected to cut interest rates following the US presidential election, but markets have adopted a fresh outlook on data and its implications for future monetary policy. After Donald Trump secured a second term, equity indices, the US dollar, and cryptocurrencies reached record highs as a Republican majority in Congress could facilitate the new administration's policies. Despite the election results, the Fed focuses on recent data in the short term, and markets widely expect a 25 basis point rate cut, with nearly a 75% chance of another cut in December. However, these odds are declining as economic indicators like GDP growth, job market figures and inflation trends suggest a soft landing, potentially prompting the Fed to signal a less dovish stance.​