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Gold Outlook: Gold Capitalizing on USD’s Weakening

Gold’s price was on the rise for the past few days as the greenback tended to weaken. The negative corelation of the two trading instruments came once again on display, as the precious metal is denominated in USD. It should be noted that the weakening of the USD initiated again after the Fed’s interest rate decision last week.

As was widely expected on Wednesday the 26th of July, the Fed delivered a 75 basis points rate hike unanimously and in its accompanying statement the FOMC kept a rather confident, hawkish tone citing a tight US employment market as well as inflationary pressures in the US economy. Fed Chairman Powell, in his press conference, which may have been the market moving element of the event, stated that inflation is much too high and wage growth is elevated, while there is still upward pressure on inflation. Yet Powell also stated that the size of the next rate hike is going to be dependent on the data to be released, which may imply that the next rate hike may not be as wide as 75 basis points, yet the bank will not hesitate to repeat it if necessary. At the same time the Fed’s Chairman stated that he does not believe that the US economy is currently in a recession as the economy is doing well in a number of areas especially the employment market. Despite Powell’s sayings the GDP advance growth rate for Q2 was telling a different story on Thursday the 27th, as it failed to exit the negative territory and signalled that the US economy is in a recession, at least technically, given that it remained in the negatives for a second consecutive quarter. We highlight that the US yields have been dropping since our last report and characteristically the US 10 year yield retreated from 2.787% on the 26th of July to the current level of 2.557%. The drop of the US yields polished the shiny metal even further for investors which may have opted it in contrast to bonds.

Also on a fundamental level, we cannot miss out on commenting on the escalation of tensions in the US-Sino relationships. It should be noted that US House speaker Nancy Pelosi is set to land in Taiwan today, the first of a high–ranking US politician in the past 25 years and the visit could be considered as a provocation for China. We note that China had warned of the possible tensions implying that it will not remain idle. Yet given that the two sides would want to avoid military confrontation, we may see other actions being opted from the Chinese side to respond. Should the tensions escalate further we may see the market turbulence intensifying with safe havens like gold being in demand, while riskier assets being sold. Yet there are chances that the escalation is to be only temporary if China chooses not to respond or respond mildly, in which case the crisis could fade away. Nevertheless, the average trader would have to consider in the case of further escalation which trading instrument would take precedence as a safe haven. Should that be the USD we may see Gold’s price dropping initially, and vice versa.

The next big test for gold’s price is expected to be the US employment report for July, which is due out on Friday. The NFP figure is expected to drop if compared to June, while the unemployment rate is expected to remain unchanged at rather low levels. Overall the US employment market seems to remain tight should the actual rates and figures meet their respective forecasts, albeit the tightening seems to be losing some steam. Please that at the time of the release there may be increased volatility for Gold’s price, so some caution is advisable.

Technical Analysis

XAUUSD H4

Support: 1750 (S1), 1722 (S2), 1682 (S3)
Resistance: 1780 (R1), 1812 (R2), 1845 (R3)

Gold’s price has been on the rise for the past few days testing the 1780 (R1) resistance line. We tend to maintain our bullish outlook for the precious metal as long as its price action remains above the upward trendline incepted since the 28th of July. Please also note that the RSI indicator below our 4-hour chart is running along the reading of 70, also implying a bullish sentiment for the bullion. Also the price action is flirting with the upper Bollinger band yet has not surpassed it and there still seems to be little room for the bulls to advance. Should the bulls actually maintain control over the pair, we may see the precious metal breaking the 1780 (R1) resistance line and aim for the 1812 (R2) resistance level that capped the gold’s upward movement also on the 4-5th of July. As the next possible stop for the bulls we note the 1845 (R3) resistance hurdle which reversed the precious metals’ bullish tendencies on the 22nd and the 23rd of June. For a bearish scenario we would require the precious metal’s price to reverse direction, break the prementioned upward trendline, which would constitute a signal for a trend reversal, yet we would also require gold’s price to break the 1750 (S1) support line. Lower than that we also note the 1722 (S2) support level and even lower we note the 1682 (S3) support barrier, that also is the lowest level of gold’s price action in our chart.

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