Gold prices have risen over the past few days as the greenback has trended weaker. The negative correlation of the two trading instruments was again evident as the precious metal is denominated in USD. It should be noted that the USD has started to weaken again following last week’s Fed interest rate decision.
As widely expected, the Fed unanimously announced a 75 basis point rate hike on Wednesday, July 26, and in its accompanying statement the FOMC maintained a fairly bullish, hawkish tone, citing a tight US jobs market and inflationary pressures in the US US economy led . Fed Chair Powell stated in his press conference, which was possibly the market-moving element of the event, that inflation is far too high and wage growth is high while upward pressure on inflation remains. However, Powell also explained that the size of the next rate hike will depend on the data to be released, which could mean the next rate hike may not be as large as 75 basis points, but the bank will not hesitate to repeat it if necessary. At the same time, the Fed chairman stated that he does not believe the US economy is currently in recession as the economy is doing well in a number of areas, most notably the job market. Despite Powell’s statements, the GDP growth rate for Q2 on Thursday 27th told a different story as it remained in negative territory and signaled that the US economy is at least technically in recession as it remained in negative territory for a second consecutive quarter. We note that US yields have fallen since our last report and characteristically the US 10-year bond yield has fallen from 2.787% on July 26th to the current level of 2.557%. The drop in US yields further polished the shiny metal for investors who may have chosen it over bonds.
Even at a fundamental level, we cannot fail to comment on the escalation of tensions in US-China relations. It should be noted that US House Speaker Nancy Pelosi will land in Taiwan today, the first senior US politician in the last 25 years, and the visit could be seen as a provocation to China. We note that China has warned of potential tensions, suggesting it will not stand by. Given that both sides wish to avoid a military confrontation, we might see other measures chosen by the Chinese side to respond. Should tensions escalate further, market turmoil could intensify as safe-haven assets such as gold are bid for while riskier assets are sold off. However, there is a possibility that the escalation will only be temporary if China decides not to respond or to respond mildly, in which case the crisis could subside. Nevertheless, in the event of a further escalation, the average trader would have to weigh up which trading instrument would have priority as a safe haven. If that is the USD, we could see gold prices falling first and vice versa.
The next big test for gold prices is expected to be the July US jobs report, which is due out on Friday. The NFP figure is expected to decrease compared to June, while the unemployment rate is expected to remain unchanged at fairly low levels. Overall, the US jobs market looks set to remain tight should actual rates and numbers meet their respective forecasts, although tightening seems to be losing some of its momentum. Please note that at the time of publication there may be increased volatility in the price of gold so some caution is advised.
Support: 1750(S1), 1722(S2), 1682(S3)
Resistance: 1780 (R1), 1812 (R2), 1845 (R3)
Gold prices have been rising for the past few days and tested the 1780 (R1) resistance line. We tend to keep our bullish view on the precious metal as long as its price action stays above the uptrend line started since July 28th. Please also note that the RSI indicator below our 4-hour chart is running along the 70 level, also implying bullish sentiment for the bullion. Price action is also flirting with the upper Bollinger Band but has not yet surpassed it and there still appears to be little room for the bulls to move forward. Should the bulls indeed retain control of the pair, we could see the precious metal breaking the 1780 (R1) resistance line and targeting the 1812 (R2) resistance level, which also capped gold’s upside on the 4th and 5th of July . As the next possible stop for the bulls, we note the 1845 (R3) resistance hurdle, which reversed the precious metals bullish trends on the 22nd and 23rd of June. For a bearish scenario, we would require the price of precious metals to reverse direction and break the aforementioned uptrend line, which would signal a trend reversal, but we would also require gold prices to break the 1750 (S1) support line. Below that we also note the support level of 1722 (S2) and even below that we note the support barrier of 1682 (S3), which is also the lowest level of gold price action on our chart.