Gold’s price remained relatively stable in the past week. Today we are to discuss the fundamental challenges laid ahead for the precious metal as well as upcoming financial releases that may affect the direction of its price action. Finally, we will be concluding this report with a technical analysis of gold’s four-hour chart.

Fed Chair Powell’s testimony in focus

Fed Chair Powell is set to testify before the US Congress later on today. The testimony is customary for the sitting Fed Chair who will face questions from the Senate Committee on Banking, Housing and Urban affairs. It is our view that the Fed Chair may face difficult questions aimed at the Federal Reserve’s monetary policy and whether or not it would be prudent to cut interest rates earlier than expected. Nonetheless, from a more general perspective, should the Fed Chair’s comments appear to be relatively dovish in nature i.e implying that the labour market is cooling, and that progress is being made to bringing inflation down to the bank’s 2% target, it could weigh on the greenback whilst providing support for gold’s price given their inverse relationship with one another. On the flip side, should Fed Chair Powell imply that the bank’s monetary policy may need to remain restrictive for a longer time period, it could aid the dollar which in turn may weigh on the precious metal’s price.

US financial releases

The US Employment data for June was released this past Friday. Despite the Non-Farm Payrolls figure coming in higher than expected at 206k, the unemployment rate ticked upwards from 4% to 4.1% implying a loosening labour market. The implications of a loosening labour market may increase pressure on Fed policymakers to ease their monetary policy stance, which in turn may weigh on the dollar and thus aid gold’s price given their inverse relationship. As such attention now may turn to this week’s release of the US CPI rates for June. The current expectations by economists are for the CPI rates to showcase easing inflationary pressures on a year-on-year basis, which in turn may fuel further our aforementioned scenario of an increase in pressure on Fed policymakers to start cutting interest rates. Therefore, should the CPI rate on a year-on-year basis come in as expected or lower, it may weigh on the greenback whilst providing support for gold’s price. However, some concern remains as the month-on-month rate is expected to showcase an acceleration in inflationary pressures.

The negative correlation of USD and Gold has re-emerged

It should be noted that gold’s price moved in an upwards fashion, with the USD losing ground during the same period. Observing the movement of the two trading instruments leads to the conclusion that the negative correlation existing between the two has resurfaced over the past week. We expect the negative correlation between the USD and gold to be maintained, in which case should the USD cede further ground we may see gold’s price increasing. 

US yields on the decline

We also note that since our last report, the yields of US bonds tended to be on the decline, with longer bonds having a more abrupt upward movement. Overall, the decline of US yields tends to reduce the attractiveness of US Bonds as an alternative safe haven investment, which in turn may have facilitated inflows into the precious metal. Should US yields continue to decline in the coming week, we may see investments being diverted from US Bonds towards gold thus providing some bullish tendencies for gold’s price. 

Technical analysis

XAU/USD hour four chart

  • Support: 2350 (S1), 2320 (S2), 2286 (S3).
  • Resistance: 2375 (R1), 2405 (R2), 2435 (R3).

Gold’s price moved higher last week yet appears to be moving in a downwards fashion since the beginning of this week. We opt for a bearish bias for the commodity and supporting our case is the RSI indicator below our chart, which despite currently registering a figure near 50, has dropped from the figure of 70 over the past few trading sessions. The decline may imply that the bullish momentum may be fading away. For our bearish outlook to continue, we would require a clear break below the 2350 (S1) support level, with the next possible target for the bears being the 2320 (S2) support base. On the flip side, for a bullish outlook, we would require a break above the 2375 (R1) resistance line, with the next possible target for the bulls being the 2405 (R2) resistance ceiling. Lastly, for a sideways bias we would require the commodity to remain confined between the 2350 (S1) support level and the 2375 (R1) resistance line.

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