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27.01.2021 01:02 PM
US dollar sends gold into tailspin

Investors' growing demand for the US dollar have sent gold into a tailspin. Bulls expected US Treasury yields to decline amid worries that Congress might not pass the $1.9 fiscal stimulus package. Bulls were disappointed to see that gold was reluctant to react to such a positive factor. Thus, gold is incurring losses despite rising inflation expectations, the correction of bitcoin, and a spike in stocks. The only reason for gold's downfall is a stronger greenback.

Investors are perplexed: all the factors that provided support for gold in December no longer do so. The rally of the S&P 500 and an increase in global risk appetite usually exert pressure on safe-haven assets, including the US dollar. However, it is not the case at the beginning of 2021. The greenback is strong even amid an unprecedented rally in the stock market. Rising inflation expectations are supposed to give support for gold since the precious metal is considered a reliable inflationary hedge. Historically, however, gold advances when consumer prices surge. So far, the quotes have been rising slowly but firmly.

Inflation expectations and USD dynamic

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So, what is the matter? What is the reason for a stronger US dollar? I assume it is a quick rollout of the vaccine against COVID-19 in the United States which also increases the likelihood of rapid economic growth in the second quarter. In Europe, on the contrary, there have been problems with vaccine supply from Pfizer and other manufacturers. This may only lead to the extension of lockdowns and a double recession.

Indeed, US President Joseph Biden promises that some 100 million American will be vaccinated during the first 100 days of his presidency. Currently, around 20.5 million, or 5.2%, of the US population received their dose of the vaccine. If the United States is one of the first countries to win the battle against the coronavirus pandemic, the opening of the country's economy will boost GDP. According to the Berenberg Economics survey, American saved $1.4 trillion in the first three quarters of 2020. This is twice as much as in 2019. As soon as life gets back to normal, consumer spending will increase sharply. This fact gives the IMF reason to predict that both the United States and China will become the main locomotives of global economic growth. Next year, their economies will fall short of the pre-crisis forecast for 2022 by 1.5-1.7%.

Deviation in forecasts for 2022 made in 2019 and 2021

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In 2020, effective management in the fight against the first wave of the pandemic in Europe became the reason to buy EUR/USD. So, why should not the equally effective management in the field of the vaccine rollout in the US support the greenback in 2021 and lead to a steep fall in the price of gold at the same time.

From the technical point of view, the fact that bulls had failed to break above the resistance 2–4 within the Wolfe Wave pattern served as the indicator of their weakness. A breakout at the support of 1815 will give a sell signal. One should consider buying gold only after it returns to the resistances of 1880 and 1890.

Gold, daily chart

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Marek Petkovich,
Analytical expert of InstaForex
© 2007-2024
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