Gold outlook: Ukraine-Russia potential ceasefire reduces haven appeal of XAU/USD

Gold held its ground as oil prices tumbled, pushing the US dollar and Treasury yields lower with it. With growing optimism around Ukraine–Russia peace talks lifting expectations that restrictions on Moscow’s oil supply will be lifted, traders are evidently preparing for even lower oil prices. That in turn could ease inflation further, allowing the Fed and other central banks to trim rates further. The improved mood filtered through to broader risk sentiment, helping European equities finish the day on a firmer note, and US indices hit new highs on the week, making back more of the losses from the week before. Gold, which has been trending positively with US markets, also managed to rise, helped along with some more dovish Fed commentary. But what about the gold outlook? Isn’t a potential peace meant to reduce haven demand for gold? And what about data suggesting Chinese physical gold demand has cooled?

 

Dollar and yields drop

 

Earlier, delayed data from September came in and pointed to a weakening economy. While US retail sales ticked up modestly in September, private payroll figures signalled a cooling jobs market and consumer confidence in November saw its sharpest drop in seven months, underscoring mounting worries over both the labour market and the wider economy. Meanwhile, wholesale inflation firmed on the back of higher energy and food prices.

 

The dollar weakened alongside oil, giving the euro and pound room to rise. Gold got a boost from a weaker dollar, while the drop in US 10-year Treasury yields also helped. Money markets now assign roughly an 80% probability to a December Fed rate cut. After weeks of choppy repricing, expectations for additional easing have crept higher, supported by increasingly dovish commentary from policymakers.

 

Oil drop: positive or negative influence on the gold outlook?

 

Well on the one hand, the sharp drop in crude oil prices has caused the US dollar to fall and currencies that rely on oil imports have all rallied – including the euro, pound and yen. The drop in yields is also helping to make low and zero yielding assets more appealing. From that point of view, falling oil prices is good news. But let’s not get too excited just yet. While reports suggested that Ukraine has agreed to the outline of a potential peace deal with Russia, nothing is signed yet and there’s still a lot of negotiation left.

 

But it is worth remembering the reason why oil is falling, too. This time, because of potential lifting of sanctions on Russia. When there’s a mix of reduction in geopolitical risks, then haven demand should fall for gold. From that point of view, you have to wonder how much further can gold rally. Recently, the extension of the trade truce between the US and China, and the re-opening of the US government should have also reduced haven demand.

 

Meanwhile, the fact that gold imports fell from Hong Kong by more than 60% in October suggests demand is cooling from the world’s top consumer nation. This is hardly a surprise given how expensive gold has become and is a potentially bearish sign.

 

Gold technical outlook: key levels to watch on XAU/USD chart

 

 

The bounce off the key $4K level has been impressive, but now at $4145-$4150 on daily XAUUSD chart, the metal is testing a potential area of resistance, where we may see the rally falter. This level was support before the drop last week. Above here, the resistance trend of the triangle formation comes into focus, before we potentially encounter that $4200-$4250 KEY resistance area again.

 

Support comes in at $4100 initially, marking the high from Friday’s session. Below that the trend of the triangle pattern comes in at 4025 area, and then $4,000. Bearish if we go below that level in the coming days.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R