After Tuesday’s strong recovery in the US dollar – particularly against the yen – and bond yields, investors will be watching markets closely to see if there is a continuation of this move. This puts gold in sharp focus, especially after pulling out of a key technical area. But was it just an outlier in the new trend, or something more significant?
There are three main areas of focus for forex and gold traders today:
- ISM Services PMI at 3:00 p.m. BST (10:00 a.m. EDT) – the headline PMI is growing at a slower pace of 53.5 from 55.3 last time. It’s also worth keeping a close eye on prices, new orders and employment sub-indices.
- factory orders also expected at 15:30 BST (10:00 EDT) – 1.3% expected vs. 1.6% previously.
- speak federally: Thomas Barkin will speak on “Winning the War on Inflation” at 4:45pm BST (11:45am EDT).
Gold and US Treasuries gave up earlier gains on Tuesday as yields surged after Federal Reserve Bank of St. Louis President James Bullard gave no indication of a slowdown in the Fed’s inflation fight, though data shows that the US economy is in recession.
Bullard said he believes the rate path is more dependent on data than it has been so far, but that the Fed needs to move into more tightening territory. He added that if inflation stays higher, the central bank will have to keep interest rates higher for longer.
Around the same time, risk pressures mounted as Nancy Pelosi’s plane approached Taiwan and investors became increasingly concerned about potential Chinese retaliation. But once Palosis’ plane landed, the pressure eased as bonds were sold and stocks bought.
Bullard’s hawkish comments and reversal of bearish bets ahead of Pelosi’s arrival in Taiwan both helped push bonds down, causing the yield on the 10-year Treasury benchmark to surge to THIS crucial level ahead of today’s macro events:
Interestingly, the rebound in the US 10-year bond yield came just days after the cleavage of its H&S support was breached, as Fed Chair Jay Powell seemed to hint that rate hikes are slowing amid growth and peak worries would inflation. If we see the neckline being decisively recaptured, that should put more significant pressure on gold. For now, it is being treated only as a rebound in a trend that has become a short-term downtrend since mid-June.
Let’s see if today’s US data or Fed speeches will lead to more volatility in bond prices and therefore gold prices.
Technically, Gold followed the script pretty closely. We’ve been calling for a rally in gold prices to at least $1850 in our recent posts and lo and behold, it reached that level on Tuesday before falling sharply, in part on profit taking. Here it has created a possible reversal signal in the form of an inverted hammer candle. But so far there has been no downside, which I think is a positive sign from a bullish perspective.
If it breaks further above Tuesday’s high, it will likely trigger a sharp follow-up rally as it would indicate that the bears are trapped. However, if Tuesday’s low is broken first and there is acceptance below it, then $1,740 could be the next stop.
What happens next now depends on the direction of bond yields and the US dollar. Both have been in a general downtrend as of late, but if either starts to make significant gains again, it could cause gold to at least take a breather, or worse, start a complete reversal. As technical traders and analysts, we let the market dictate direction and act accordingly. If you haven’t been long, it might be best to wait now for the market to give us fresh bullish signals.
Looking ahead: US report on nonfarm payrolls (Friday)
Gold traders will look forward to Friday’s US jobs report once today’s US services PMI release wraps up. The US jobs reports did not have the same impact on the markets as the focus was on inflation and the economy. But if we see weak employment again it will continue to worry investors about the health of the world’s largest economy and provide some support for gold.
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