Gold prices have pulled back as markets assess a new US-Japan trade deal and await updates on EU-US negotiations. Currently, XAU/USD is trading above $3,400, supported by ongoing tariff risks and general policy uncertainty. The updated US-Japan agreement lowers tariffs on Japanese goods from 25% to 15% and includes plans for $550 billion in Japanese investments. Recent data showed a decline in US existing home sales, which fell to an annual rate of 3.93 million in June, below the expected 4.01 million. This decline points to high mortgage rates and affordability issues in the housing market. Meanwhile, EU-US trade discussions remain unresolved, raising concerns about potential new tariffs on EU imports.

Gold’s Appeal and Market Factors

Pressure on the Federal Reserve to lower interest rates has impacted yields, which in turn limits gains for the US Dollar. President Trump has publicly criticized Fed Chairman Jerome Powell and keeps pushing for lower rates. This political and economic backdrop has increased the attractiveness of gold. With XAU/USD at around $3,412, there’s a chance it could retest a high of $3,452, thanks to positive momentum shown by the Relative Strength Index at 63. Even though the USD is influential in global markets, its value remains tied to Federal Reserve policies. Changes in inflation or employment can affect USD strength. Typically, quantitative easing weakens the USD, while quantitative tightening strengthens it. We view the recent drop in gold prices as an opportunity rather than a warning. Despite some trade resolutions, ongoing policy uncertainty and tariff risks help support gold prices. Traders in derivatives should see this as a chance to position for an upward trend rather than selling long positions. The partial US-Japan agreement and recent temporary pauses on EU steel tariffs until 2025 may create short-term challenges for gold prices. However, we see these dips as good opportunities to enter the market. Buying call options with longer expiration times could help traders benefit from a bullish trend while minimizing risks.

Economic Data and Trading Strategies

New data shows US existing home sales dropped to an annual rate of 4.14 million in April 2024, adding to concerns about fragile economic conditions. This weakness, influenced by high mortgage rates, may push the central bank to consider easing its policies later this year, which supports gold as a hedge against a potential slowdown. The direction of the Federal Reserve is crucial, as Chairman Powell has indicated a “higher-for-longer” approach while under pressure to lower rates. The US inflation rate, still at 3.4%, complicates when adjustments might occur and can lead to market volatility. This situation makes strategies that profit from price fluctuations, like long straddles, particularly appealing. Historically, gold has thrived in uncertain times and before rate cuts, much like during the stagflation of the 1970s. With XAU/USD trading around $2,320 and its momentum indicator stable, we believe there’s potential to reach recent highs. We consider the current market conditions as a strategic opportunity to increase exposure and capitalize on potential gains. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now