Market News
Calling the USD right means trading gold gets a whole lot easier
The strong negative correlation between gold and the USD makes calling the USD’s direction essential for gold traders. With key support and resistance levels forming on gold futures and upcoming CPI and Fed decisions, the market is at a critical juncture.
Key Points:
• The correlation between gold and the USD remains highly negative, averaging -0.76 over 12 months.
• Treasury yields and Fed rate expectations are driving the USD higher, impacting gold prices.
• Technicals on gold futures suggest support near $1931/$1940 and resistance at $1970/$1983.
The Strong Negative Correlation Between Gold and the USD:
Gold prices and the USD maintain a strong negative correlation, currently at -0.94. This correlation underscores that movements in the USD often dictate the direction of gold. Accurately predicting the USD’s trajectory is key for gold traders.
The USD Outlook and Its Impact on Gold:
Treasury yields have risen following the May FOMC meeting, with the market pricing a 65% probability of a 25bps rate hike by July. Real yields on 10-year Treasury Inflation-Protected Securities (TIPS) have climbed, pushing the USD higher. However, real yields are nearing a ceiling, and upcoming US CPI data and the FOMC decision could determine whether they break higher.
Technicals on Gold Futures:
Gold futures are consolidating near key support levels:
• $1931 coincides with the 50% Fibonacci retracement of the $1808/$2072 rally and a seven-month uptrend.
• Overhead resistance is at $1970/$1983, with a break needed to re-establish a bullish trend.
What’s Next for Gold and USD:
The market awaits critical events:
• US CPI data on Tuesday, which will shape inflation expectations.
• The Fed’s FOMC decision, where guidance on future rate hikes will impact Treasury yields and the USD.
Gold’s price trajectory will hinge on these developments, with a breakout above $1983 paving the way for $2000/$2010 or a breakdown below $1931 leading to further declines. For now, traders can view the current levels as a consolidation phase before a decisive move.
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