Gold’s Sharp Pullback: Correction or Reversal Amid Easing Risk Sentiment and a Weaker Dollar?

Golds Sharp Pullback: Correction or Reversal Amid Easing Risk Sentiment and a Weaker Dollar？

During early Asian trading on Monday, May 26, spot gold faced a wave of intense selling pressure, dropping as much as $26 to a two-week low of $3,331.44 per ounce. The sell-off was triggered by the Trump administrations announcement to delay the imposition of a 50% punitive tariff on the European Union, which led to a sudden cooling of risk-off sentiment and stripped gold of its immediate support.

However, from a broader macroeconomic perspective, the weakening U.S. dollar, appreciation of the euro, and evolving U.S.-EU interest rate dynamics may continue to offer medium-term support for gold prices. Was this plunge a sign of a trend reversal—or merely a pause in the rally？ This article explores three structural drivers behind golds outlook.

1. Fading Risk Aversion: Why Did Gold Fall Sharply？

President Trumps decision to postpone the EU auto tariff deadline to July 9 after a call with European Commission President Ursula von der Leyen eased fears of escalating global trade tensions. As a traditional safe-haven asset, gold retreated sharply in response to the improved risk climate.

Markets reacted swiftly. Intraday, gold fell nearly 0.8%, with aggressive selling observed during high-liquidity trading sessions. Such headline-driven volatility has increasingly become the norm in gold trading in 2025.

2. Pressure on the Eurozone: Could Tariffs Break Germanys Back？

Although the Trump administration pulled back for now, the EU faces significant downside risks should the 50% tariff take effect in July. According to Germanys Kiel Institute for the World Economy:

• EU exports to the U.S. could fall by 20% in the short term;

• Germanys GDP would decline by 0.1% in 2025;

• If retaliatory measures are enacted, cumulative economic losses through 2028 could exceed €250 billion.

The real blow, however, comes from weak economic data. The eurozones May composite PMI fell to 49.5, slipping below the 50 threshold, signaling ongoing contraction in services. While manufacturing shows signs of recovery, it remains insufficient to sustain broader growth momentum.

The European Central Bank is expected to cut rates by another 25 basis points on June 5, bringing the deposit rate down to 2.00%, potentially marking the end of the current easing cycle.

3. Structural Dollar Weakness: Medium-Term Support for Gold Remains

Meanwhile, the U.S. Dollar Index posted five consecutive days of losses last week, falling 1.9%—its steepest weekly drop since November 2023. While Treasury Secretary Bessent downplayed the decline, stating “the dollar isnt truly weakening—other currencies are merely strengthening,” markets clearly disagree.

Speculative capital is rotating out of dollar-denominated assets. According to CFTC data, net dollar short positions reached $16.5 billion in mid-May—the highest level since September 2024. Flows have shifted toward non-dollar currencies such as the euro, kiwi, Aussie, and yen—alongside renewed interest in gold.

Domestically, the Peterson Institute warns that if the 50% tariffs are implemented, the U.S. may face inflationary pressures and supply chain disruptions, which could drag Q3 GDP into contraction territory.

Conclusion: A Technical Correction, Not a Trend Reversal—All Eyes on the Dollar

This sharp decline in gold is better seen as a technical correction within an ongoing structural uptrend—not a reversal. The key variables ahead include whether the U.S. dollar stabilizes, if U.S.-EU policy divergence narrows, and whether renewed trade tensions revive safe-haven demand.

If gold can hold the $3,300 support level, it remains poised to retest the previous high of $3,435. Despite the recent dip in the Relative Strength Index (RSI), it remains above the neutral 50 mark, indicating that bullish momentum is not yet broken. As geopolitical risks or macroeconomic data deteriorate, gold bulls could stage a comeback.

Fundamentally, gold remains a pivotal asset amid the global uncertainty of 2025—not only as a hedge against risk but as a strategic offset to structural imbalances in the global monetary system.

[Gold Price Technical Outlook]

From a technical perspective, the pullback from the $3,365 weekly high reflects short-term profit-taking. However, the broader trend remains bullish, with RSI staying above the neutral line despite a mild downtrend. Long positions opened near recent lows can still be held for potential upside.

• Resistance: $3,365/oz

• Support: $3,248 / $3,300 / $3,335 per ounce

Risk Disclaimer: The views, analysis, research, prices, or other information contained in this article are provided as general market commentary only and do not constitute investment advice. Readers are solely responsible for any trading decisions made and should proceed with caution.