Gold Price Gallops North on Weaker US Dollar Ahead of Fed
The dollar fell to an eight-month low on Tuesday after a raft of data showed the US economy losing momentum, making gold more attractive for holders of foreign currency. The Federal Reserve’s (Fed) decision to cut rates by 200 basis points starting later this year may also benefit gold. However, higher-than-expected inflation and stronger growth may keep the Fed from cutting rates more aggressively than expected.
The US economy was weaker than expected in August, according to the ISM’s manufacturing index, which dropped by more than three points. It was the worst result since February, and marked a sharp downturn for the economy overall. That weakened sentiment was reflected in the dollar, which tumbled as bond prices plummeted.
Despite the US economy’s woes, gold rallied by more than 1.7% on Wednesday. That rally was driven by a weakening dollar ahead of the Fed’s meeting.
There’s no clear reason why the dollar is so weak, but a deteriorating economy might be behind the decline. The US credit rating is under pressure and the Fed downgraded its GDP forecasts. This could be a double-edged sword for gold. A weaker dollar can be a good thing for gold, but it also could mean that inflation is more sticky than expected, which may prevent the Fed from cutting rates as aggressively as it has in the past.
Where to for XAU
The gold price rallied more than 2.4% Monday and has been steadily carving a well-defined range just below key resistance. The immediate focus is on a breakout / close above monthly downtrend resistance. This should provide further conviction for a larger recovery in the weeks ahead.
Note that a break lower from here would threaten the monthly downtrend and likely put back into focus the wider double-top scenario that defined the March decline. The key zone to watch is the 1729/35 confluence at 1729/35 – a break there would expose a larger retracement to the August 2021 low-day close and the 61.8% Fibonacci retracement at 1753/61, both of which offer potential downside exhaustion.
Technical Outlook:
XAU/USD continues to trade within the confines of an embedded ascending pitchfork formation that extends off the July lows. A topside breach / close above 1791 is needed to fuel a rally higher towards critical Fibonacci confluence support at 1671/82 and the key weekly / 61.8% retracement objective at 1875/77- stay nimble into the weekend with US Non-Farm Payrolls on tap Friday!
A breach of monthly downtrend resistance is still possible here IF a breakout above 1763-1804 is reached. From a trading standpoint, look to reduce portions of long-exposure / raise protective stops- losses should be limited to 1900 IF price is indeed heading higher with a breach / close above 1959 needed to fuel the next leg towards critical resistance at 2000.
Ultimately, the immediate advance should be respected. Taking short-bias away early in the month would expose the lower parallel backed by 1753/61, which is also a key zone of interest for a break lower IF the broader setback continues.