US Dollar and GOLD Technical Analysis

From a technical perspective, gold was likely due for a noticeable pullback judging by the red-hot relative strength index (RSI). The RSI has been increasingly sending an ‘overbought’ signal due to the 13 percent runup in the commodity since bottoming August of last year. As such, the selling in gold could be viewed as a healthy ‘reversion to the mean’ with prices consolidating back towards its moving average.

Although, gold bulls were likely disappointed after the 0.786 Fibonacci retracement line – which rests around the psychological $1,300 support level – did not hold with prices breaking below this consolidation area. This may have soured sentiment further and induced additional selling as short-term momentum traders react to the apparent end of gold’s parabolic ascent.

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On a strictly statistical basis, the Dollar closed out a particularly painful week. Yet, the context of its broader technical patterns and environment suggests we are not yet in a position to expect the revival of a genuine trend. Extending its impressively precise range reversal from 97.75, the DXY dove back into the middle of its congestion pattern stretching all the way down to support defined by the confluence of the trendline reaching back to May and the 200-day simple moving average now at 95.80. From Friday close to Friday close, the index dropped approximately 0.8 percent for the worst slide since the week of August the 20th. Before that, we don’t have a comparable performance until February of last year – when the currency was searching out the bottom of its 14-month bear trend. This move promises little for the development of a new phase beyond the established range. On the other hand, volatility applied to tightly bound spaces runs a greater and greater risk of prompting a breakout – especially as key events like this coming week’s FOMC rate decision pop up.

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Big-picture wedge continues to develop



The US Dollar continues to be a difficult market for traders as low volatility puts a strangle-hold on the trading environment. Looking at the big-picture ascending wedge developing it is well within reason to expect more of the same for a little while longer as the pattern continues to fill out towards its apex.
This doesn’t mean there won’t be room for opportunities or for a surprise move as low-vol is indicative of complacency among market participants. With that said, though, patience and trade selectively will be the key until a more fertile trading environment develops.

The two primary points of interest are the top-side horizontal line crossing over peaks since November and the underside trend-line of wedge, which also happens to be in confluence with the rising 200-day MA. There is another trend-line running up from early 2018, but of lesser importance than the one just beneath it.

For now, the thinking is to look for fade-trades off one of the aforementioned levels once momentum turns in the other direction. Should one side break (top-side looking most likely) then the game-plan will pivot towards running with the breakout as volatility may finally see a pop.
What may push the DXY into resistance early this coming week, is a falling wedge on the 4-hr time-frame. It may not trigger its top-side trend-line so waiting for an actual breakout is crucial. Given its close proximity to the 97.60s this is likely to only hold a small amount of potential before price could reverse off big resistance.

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Retail trader data shows 74.0% of traders are net-long with the ratio of traders long to short at 2.85 to 1. The number of traders net-long is 0.3% lower than yesterday and 11.7% higher from last week, while the number of traders net-short is 10.9% higher than yesterday and 5.5% higher from last week.

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Price is approach the upper bounds of this consolidation range with daily resistance steady at the August 2013 high at 1433. A breach / close above this threshold is needed to validate the breakout with such a scenario eyeing subsequent resistance targets at 1451 backed by the 50% retracement of the decline off the record highs at 1483.

Notes: A closer look at gold price action shows gold breaking above the weekly opening-range highs on an outside-day reversal candle yesterday with price defending weekly open support today at 1415. The focus is on a breach above consolidation resistance at 1433/35 to keep the long-bias in play targeting 1441 and 1451. Monthly open support rests at 1409 backed by 1440 – ultimately a break / close below the July support line, currently ~1390 needed to suggest a larger correction is underway.

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Gold prices continue to struggle to regain their footing in an environment defined by cooling tensions on the US-China trade war front. The latest truce between the world’s two largest countries has provoked a recalibration of easing expectations from the G10 currencies’ central banks, in turn sending sovereign bond yields higher across the developed world. The sharp rise in US Treasury yields in particular can be pointed to as a reason for gold’s recent struggles.

The shifts in US Treasury yields around the latest US-China trade war news feeds directly into one of the most important fundamental underpinnings of precious metals’ rallies: environments that produce falling real yields tend to be the most bullish. On the other hand, environments that produce rising real yields tend to be the most bearish for precious metals.

Real yields are inflation-adjusted yields: in this case, the US Treasury 10-year yield minus the headline inflation rate. Why does this matter? Investing is all about asset allocation and risk-adjusted returns. On the asset allocation side, it’s about achieving required returns given the investor’s wants and needs.
If inflation expectations are rapidly increasing, you would expect to see fixed income underperform: the returns are fixed, after all. Why would you want to have a fixed return when prices are increasing? On a real basis, your returns would be lower than otherwise intended.

Rising US real yields means that the spread between Treasury yields and inflation rates isincreasing. If precious metals yield nothing (no dividends, coupons, or cash flows), they would be ill-suited to hold when US real yields rose.

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The US Dollar may rise as initial jobless claims stabilize at historically elevated levels. Non-farm payrolls may surprise higher, but FOMC minutes could sink the S&P 500 and boost USD.
More of the same could be ahead. Data out of the world’s largest economy has increasingly outperformed relative to expectations.

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Gold prices may surrender to the US Dollar if another wave of the coronavirus hammers global growth prospects and destabilizes the fragile corporate debt market.

Anti-fiat hedges like gold may surrender in the third quarter if a second wave of the coronavirus hits the global economy and dampens future inflation prospects. Demand for haven-linked assets like the US Dollar may amplify XAU/USD’s losses as traders re-allocate capital from relatively illiquid commodities to more frequently-traded currencies like the Greenback. Rising unemployment numbers and uncertainty embedded in labor statistics could also magnify the appeal of holding haven-linked assets. The prospect of another lockdown in numerous localities around the United States could further dampen price growth and erode the appeal of gold. Fed Chairman Jerome Powell warned that the road to recovery will be arduous and “long”. Furthermore, financial fragility in the corporate debt sector could also hurt gold prices if the market for leveraged loans and other credit derivatives undermine interbank stability. The dramatic widening of spreads on credit default swaps (CDS) for sub-investment grade corporate debt during the global selloff in equity markets in March saw gold prices crater with risk-oriented assets.

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Gold prices may surrender to the US Dollar if another wave of the coronavirus hammers global growth prospects and destabilizes the fragile corporate debt market.

• Gold prices could retreat if a second wave of the coronavirus hits the global economy.
• XAU/USD losses may be amplified by rising unemployment figures, weak price growth.
• Gold may surrender to USD if eroding fundamentals destabilize corporate debt market.

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