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  • Gold has been on the back foot amid a stronger dollar in recent trade, dropping to the low $1830s recently.
  • A stronger dollar amid risk-off and dovish ECB news has weighed on precious metal markets.

Spot gold prices (XAU/USD) have been on the back foot in recent trade, dropping from early European morning session highs of above $1850 to recent lows of the day just above $1830. That means spot prices have now lost grip of the 200-day moving average at $1847, around which prices had consolidated during Asia Pacific trade.

Driving the downside has been a stronger US dollar, which has picked up amid a broad deterioration in the market’s appetite for risk. Though the market is seeing volatility in other asset classes (such as stocks), trade-in precious metals markets is likely to remain somewhat constrained as traders tread water ahead of Wednesday’s FOMC meeting; the FOMC will release the results of their latest monetary policy decision at 19:00GMT and FOMC Chairman Jerome Powell will address and take questions from the media at 19:30GMT. As of right now, spot gold prices are 0.8% or about $15 lower on the day.

Driving the day

“Turn-around Tuesday”, which saw global equities strengthen and safe havens currencies come under pressure, did not materialise into a lasting pick up in risk appetite. Indeed, European equities are back on the defensive (Stoxx -1.7%) and US stocks just saw an ugly open (S&P 500 -1.4%). Covid-19 concerns (about the spread of new strains, lockdowns and international travel restrictions) are being cited, as are worries that the EU might turn towards vaccine protectionism as its programme falls further behind that of the UK and US.

Meanwhile, as the manic battle between retail traders and short-selling hedge funds continues (retail traders, egged on by billionaires such as Elon Musk, are pumping stocks like GameStop in an attempt to force a short squeeze), concerns that such behavior might be indicative of a broader stock market bubble are growing. Some analysts see recent moves as symbolic of a market that may be overvalued following floods of fiscal and monetary stimulus unleashed by authorities in 2020 in order to ward off the economic impact of Covid-19. Newton Investment Management’s Catherine Doyle told Reuters that people “taking a punt on the market” is a sign that “risk appetite has got carried away”.

Whatever is causing the downside, the stock market sell-off is having its usual impact on other asset classes; bond yields are down, commodities such as crude oil and industrial metals are down and in FX markets, USD is far and away the best performer and the stronger US dollar is weighed on precious metals.

USD strength is being exacerbated by dovish commentary from ECB members and sources on Wednesday; ECB Governing Council Member Klaas Knot, who is typically one of the more hawkish members at the bank, made dovish remarks in which he said that the ECB has the necessary tools, including further rate cuts, to prevent any further strengthening of the EUR. Meanwhile, only a few minutes ago, ECB sources cited by Bloomberg said that ECB officials reportedly think that markets are underestimating the odds that the bank might cut interest rates and policymakers at the bank are said to agree that such stimulus remains a viable option. This latest news triggered a bout of weakness in EUR (and other G10 pairs) and strength in the US dollar, which has weighed on precious metal markets.