- With ECB, BoC signaling they are nearly done with hikes, all eyes/ears on Fed
- Gold bulls may have found a home in high $1,900s till Fed decision
- Dollar will be key as well to gold’s outcome, with downward move limited
- Dollar Index
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Spot Gold
One or two more? It’s a question traders across markets have been vexing over as the Federal Reserve enters the final week to its July 26 rate decision. The debate, of course, is whether next week’s highly anticipated quarter-point hike will be the last in the central bank’s current tightening cycle. If so, then celebrations galore for most risk assets. If not, the head-scratching on direction continues for traders, especially in gold.
Whatever the case, between now and next Wednesday, longs in bullion seem to have found a home in the high $1,900s, particularly after the 7-week highs attained in the previous session on the back of hard-fought wins against inflation by the central banks of Europe and Canada.
The European Central Bank signaled earlier this week that it could be ready to pause on rate hikes from September onward. In Canada, meanwhile, inflation dropped within the control range of the Bank of Canada for the first time since March 2021.
Thus, attention next week will be on not just what the Fed does but also says, given Chairman Jay Powell’s stance at his June news conference that the central bank might be in a position to do two more rate hikes before the year is out.
Gold’s Fundamentals: All Stars Aligned for High $1,900
For what it’s worth, Powell also said last month that the Fed’s decisions will be data-driven, and all relevant data that matters — from the Consumer Price Index, or CPI, to monthly nonfarm payrolls — suggest U.S. inflation is easing.
Falling global bond yields were also prodding investors to move out of Treasuries and into better potential havens like gold as well as true risk assets such as oil and equities, said analysts.
If Powell says or — even remotely suggests — that the Fed is done for this year with hikes, gold longs will be off to the races for $ 2,000 an ounce.
As of Tuesday’s close, The front-month August gold contract on New York’s Comex settled at $1980.80 an ounce, up $24.80, or 1.2%. The session high was $1,988.25, a peak Comex gold had not gotten to since cresting at the $2,000 in late May.
The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, settled at $1,977.62, up $19.85, or 1.2%.
Ed Moya, who heads markets research at online trading platform OANDA, said:
“Gold might struggle to make a run at the $2,000 level, but that could change if bond yields continue to come down and the Fed signals they are likely done hiking next week after delivering one last quarter-point rate rise.”
Knowing Powell, he will likely say the Fed is heartened at the progress it has made in slowing inflation — which, according to the CPI, grew by just 3% per annum in June versus the 40-year high of 9.1% a year ago. But while taking that victory lap, the Fed chair will probably add that he was leaving the door open to another hike should inflation spike again.
And just as important as the Fed’s actions and thoughts is the dollar, which tumbled to 15-month lows over the last few sessions, putting oil, gold, and even select grains, in an upward trajectory.
Gold Technicals: Pre- and Post-Fed
The dollar index is approaching the 50-month Exponential Moving Average, or EMA of 98.90, which if broken, could send it hurtling toward the next lower leg of the 200-Week Simple Moving Average, or SMA, of 98.20, says Sunil Kumar Dixit of SKCharting.com.
“This is a core support level and the dollar is likely to rebound if it gets there, limiting gold’s upward move,” said Dixit. “But like all market dynamics, it’s subject to the vagaries of news and high-voltage events.”
Charts by SKCharting.com, with data powered by Investing.com
This structure indicates that any gold rally is likely to be limited to $2,010, which coincides with the 61.8% Fibonacci level of retracement measuring from the $2,081 high to the $1,893 low, Dixit adds.
Following the strong breakout above $1,963, spot gold went on to $1,984, reaching the threshold of the 50% Fibonacci level of $1,986, Dixit says.
A temporary consolidation below the $1,986 resistance can cause some downside moves toward the support areas of $1,972-$1,962, he adds.
“Rally may begin from these breakout zones, resuming upward momentum for a renewed attack on $1,986, which once cleared, opens way for the next leg higher of the 61.8% Fibonacci level of $2010,” said Dixit.
“This zone, comprising $1,986 and $2,010, is a make or break phase for the yellow metal.”
Failure to clear through the zone, he said, will trigger a sell-off which gets initial confirmation by a break below $1,965 and a retest of $1,945, followed by $1935.
A break below $1935 will put bears in control for a downside potential of $1,900 and $1,850, accomplishing a major part of the correction, he added.
“On the flip side, strong bullish continuation above the $1,986-$2,010 resistance zone will eventually open the door for retest of the $2,070-$2,080 horizontal resistance.”
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Disclaimer: The content of this article is purely to educate and inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.