Gold dropped around $5 overnight to around $1,215/oz Wednesday morning, under pressure from a rebounding dollar, which suffered sharp losses Tuesday on a rally in the pound and comments from Donald Trump on the US currency's relative strength.
The US Dollar Index fell as much as 0.85% Tuesday following comments from the US president-elect, in which he described the US dollar as too strong, particularly against the Chinese currency, in an interview with US media ahead of his inauguration Friday.
"It is hard to formulate a base-case for economic forecasts when US economic policy appears to be formulated on-the-run and in the media," ICBC Standard Bank's Tom Kendall said in a note Wednesday, highlighting the uncertainty surrounding the president-elect which has helped gold climb up over 5% since the turn of the year.
"In addition, a number of the president-elect's favoured fiscal policies are contradictory with respect to his apparent desire for a weaker dollar," Kendall said, referring to an increased flow of inward investment and capital, which would raise inflation expectations.
According to CME Fed Fund Futures the probability of a lift in the Federal Reserve base rate is above 50% by June, with a second rate likely by November.
Looking past the immediate effect of "dollar is too strong" headlines, however, Kendall does not expect to see the end of the dollar rally that began in May last year.
The dollar index has recovered around 0.22% in early trade to around 100.55 at 1000 GMT, up around 0.25% against the euro and 0.70% versus the pound.
The pound strengthened close to 3% against the dollar Tuesday following UK Prime Minister Theresa May's comments on Brexit, in which she indicated the country will leave the single market and seek a "bold and ambitious free-trade agreement" with the European Union.
The speech was reported to have caused unease in Europe, as it included the possibility of walking away from a settlement if it was not in the UK's best interest, with Commerzbank concluding it had "more questions than answers," in a note Wednesday.
"Ultimately, all May has done is to declare her negotiating stance. May's demands are hardly likely to be accepted by the EU, so exit negotiations will presumably drag on for some time," Commerzbank said. "This should result in latent uncertainty among market participants, and ultimately contribute to solid gold demand, above all in Great Britain and continental Europe."
