Fundamentals undermine US Dollar outlook, support Gold price

The US Dollar is suffering from a negative outlook compared to its main counterparts, especially the Euro. This could result in losses for the US Dollar Index (DXY) which tracks the value of the currency against a weighted basket of counterparts. Such a deadline would provide a bullish catalyst for XAU/USD.

In the case of the Euro, the US Dollar may decline due to a possible closing of the interest rate differential between the currencies, which hitherto has favored the Greenback. Currencies with higher rates gain an advantage via the effect of the carry trade in which investors profit by borrowing currencies in a low interest rate jurisdiction and using the money to buy a currency yielding a higher rate of return. 

The gap is likely to close because the Federal Reserve (Fed) is widely seen as reaching the end of its hiking cycle, whilst the European Central Bank (ECB) is still viewed as being at the start of its cycle. 

The Fed is also seen as more limited in how much higher it can raise rates compared to the ECB due to the different effects higher rates have on the two region’s banking systems. 

According to Andrew Stimpson, KBW Head of European Banks Research, Europeans are much less likely to withdraw their bank deposits and invest them in higher yielding money market funds – the root cause of the US banking crisis.  

“In Europe we haven’t got the same ease to switch into a money market fund, that is not a normal product that the general population will think of,” said Stimpson in an interview with Bloomberg News.

“The absolute level of rates in Europe is also lower than in the US, so if you are going to sit down on a Sunday afternoon and sort out your finances, whether you are going to switch from an overnight rate of zero to a timed deposit of 1.6-1.7% it is probably not going to make much  difference to you,” Stimpson added.