Gold regains $4,000 as Democrats’ victory in Congress unsettles US Dollar

• Fiscal worries following the Democrats’ victory renew demand for gold, lifting prices.
• Further upside could be constrained by expectations that the Fed will raise rates again in December.
• With the RSI moving back towards neutral, XAU/USD encounters initial resistance around $4,074 at the 20-day SMA.

US midterm election results point to divided government and a greater risk of political deadlock in Washington, helping Gold (XAU/USD) recover above $4,000 on Wednesday. The metal is rallying, with XAU/USD around $4,041 at the time of writing, a gain of 3% on the day.

With Democrats taking control of both houses of Congress, the Trump administration will require their backing for new legislation, spending packages, additional tax cuts and any increase in the debt ceiling.

As political uncertainty renews demand for gold as a safe haven, it is also putting pressure on the US Dollar, reducing the cost of bullion for holders of other currencies. Near five-week lows, the US Dollar Index (DXY) stands at around 101.40, a daily decline of 0.44%. The index measures the Greenback against a basket of six major currencies.

Gold rebounds as US fiscal concerns mount, with Fed outlook little changed

Elevated energy costs stemming from Middle East tensions continue to fuel inflationary pressure, reinforcing the hawkish stance of the Federal Reserve (Fed) and other major central banks. That backdrop may make gold’s recovery difficult to sustain: higher borrowing costs increase the opportunity cost of owning the non-yielding metal.

Despite the Democrats’ blue wave in the US, strategists at Societe Generale say it “should not change the direction of travel for the Fed, at least not in the short term,” and continue to regard “a 25bp rate increase in December” as “a high probability event.” Ahead of the Treasury’s quarterly refunding announcement later today, they highlight that “futures for June -27 flatten to 55.5bp (-2.5bp)” and “the 2s/10s curve trades flat at 33bp,” in their assessment of markets.

On fiscal policy, however, Societe Generale’s economics team warns that, “with regard to the US fiscal trajectory,” they “see greater risk of government shutdown,” which they suggest “may explain the rebound in Gold to over $4000.”

The CME FedWatch Tool puts the probability of a December rate increase priced in by traders at 82%. Expectations of additional tightening could also help limit losses in the US Dollar.

Upcoming US economic releases will be watched for further indications of the Fed’s policy direction. The ADP Employment Change report and October’s ISM Services PMI are due on Wednesday, with weekly Initial Jobless Claims following on Thursday and Nonfarm Payrolls (NFP) on Friday.

Technical Analysis: rebound strengthens while bearish bias persists

Trading below $4,074, where the 20-day simple moving average (SMA) forms the middle Bollinger band, leaves XAU/USD with a slightly bearish near-term outlook on the daily chart. Resistance at the upper Bollinger band around $4,253 also limits the scope for rallies. Momentum signals remain mixed: the Relative Strength Index (RSI) has recovered to 46 in neutral territory, while the Moving Average Convergence Divergence (MACD) indicator is stabilising but remains negative.

Initial downside support lies at the psychological $4,000 mark. Below that, the lower Bollinger band around $3,894 precedes last week’s yearly low of $3,870. A close above the middle Bollinger band at $4,074 would reduce downward pressure, although the upper band near $4,253 offers firmer resistance, followed by the broader structural barrier at $4,400.

(An AI tool assisted in writing the technical analysis for this article. Find out more.)