Gold’s rally maintained, yet a correction lower seems to be just around the corner

The rally of gold’s price seems to be unstoppable with fundamental issues providing safe haven inflows for the shiny metal. In this report we are to examine the validity of the negative correlation of the USD with gold’s price, the uncertainty in the markets and Fed’s intentions. We are to conclude the report with a technical analysis of gold’s daily chart, for a rounder view.     

Negative correlation of USD with gold’s price seems to be active

The negative correlation of the greenback with gold’s price seems to be in place. It’s characteristic that over the past two weeks the USD Index is dropping signaling a weakening of the USD against its counterparts while gold’s price is rallying. It should be noted though that there are some inconsistencies in the movement of the two trading instruments but the big picture of the daily chart is quite telling.

Hence should we see further weakening of the USD in the coming days we may see gold’s price getting additional support. We also note that US yields despite some ups and downs remained relatively stable, while gold’s price continued to rise practically highlighting the temporary at least disassociation of gold’s price with the levels of US yields.

Yet should US bonds sell off again in the coming days we may see safe haven flows being redirected towards US bonds. On the flip side, it should be noted that a possible sell off of US bonds would be indicative of the lack of confidence on behalf of investors for the prospects of the US economy, thus if such a rationale dominates, it may allow gold to escape unscathed from such a sell off of US bonds.   

Trump’s attack on Powell intensifies safe haven inflows for gold

Gold’s price renewed its bullish movement as besides the uncertainty caused by Trump’s trade wars, the US President is now openly attacking the Fed Chairman as well. Fed Chairman Powell has expressed his doubts for the necessity of extensive rate cutting in the face of the possibility of higher prices, given the US President’s tariff policy.

On the flip side, the US President wants monetary policy to ease substantially in order to boost consumption and production levels. The issue goes further as should the Fed keep rates high or fails to reduce them substantially the US government may have to provide a boost to the US economy on a fiscal level, by increasing the national debt or refraining from reducing corporate taxes.

Fed Chairman Powell had expressed his intention to serve his term until the end and the US President is increasingly looking for ways to end his term while at the same time, US President Trump is increasingly attacking the Fed Chairman on social media, either by calling him a loser or asking for his resignation, thus setting into doubt the independence of the Fed as a whole.

The issue tends to intensify uncertainty among market participants, thus leading even more safe haven inflows towards gold. Thus any further escalation on Trump’s behalf could enhance gold’s price bullish movement. 

The Fed’s stance

Given the low number of high impact financial releases in this week’s calendar, stemming from the US, which could affect gold’s price materially, we expect fundamentals to lead gold traders with Trump being the first violin, yet the Fed’s stance could also play a key role in the market’s mood.

Should we see Fed policymakers continuing to maintain their doubts for the necessity of extensive rate cuts, we may see gold bulls hesitating, while should Fed policymakers enhance the market’s dovish expectations gold bulls could gain further.  

Gold Technical Analysis

XAUUSD 4H Chart

• Support: 3400 (S1), 3300 (S2), 3167 (S3)
• Resistance: 3500 (R1), 3600 (R2), 3700 (R3)

On a technical level, we highlight that Gold’s price continued to rally over the past week and yesterday broke the 3400 (S1) resistance line, now turned to support and continued to rise testing the 3500 (R1) resistance level in today’s Asian session, reaching new record high levels. We also note the steepening of the upward movement of gold’s price action over the past two weeks, underscored by the upward trendline guiding it.

We maintain our bullish outlook for the precious metal’s price for the time being, yet a correction lower may be in the works for the precious metal’s price.

The RSI indicator is clearly above the reading of 70, in a signal of a strong bullish sentiment and at the same time as a warning that the precious metal’s price is at overbought levels.

Similar signals are coming from the fact that the price action is above the upper Bollinger Band.

Hence we maintain our bullish outlook, yet  issue a warning for a possible correction lower of gold’s price. Should the bulls maintain control over the gold’s price as expected we may see it breaking the 3500 (R1) resistance line, with the next possible target for the bulls being the 3600 (R2) resistance level.

Should the bears take over we may see gold’s price breaking the upward trendline guiding it, in a first signal that the upward motion has been interrupted and continue to break the 3400 (S1) support line and test the 3300 (S2) support level.

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