Gold futures start to shine as USD falters

The near to medium-term correction in Gold futures has played out. A new bull trend is developing. The trigger for this change has been a re-assessment of Fed tightening which has driven a USD correction. The rally has come to an important test of resistance. A breakout would open upside potential for continued gains. The US data has changed the outlook for Fed expectations. We have been told for a while that the Federal Reserve is data-dependent. That is why markets have taken recent softer key tier-one data announcements in the manner that they have. Nonfarm Payrolls and a series of inflation releases (especially the US CPI and US PPI) have each come in softer than forecast. The data is telling us that the US labor market is just teetering slightly, but more pertinently, that US inflation may not be as stubborn to reduce. The market is taking this in combination and surmising that the Federal Reserve will not need to be as hawkish as it has previously guided. The “hawkish hold” of the June FOMC was backed up for a few weeks by hawkish comments and testimonies by Fed Chair Powell. However, with the Fed into its Blackout Period in front of next week’s July FOMC meeting, the data has changed the market’s perception of just how the Federal Reserve’s tightening cycle will culminate. The Fed Funds futures (as measured by the Overnight Index Swaps) give us an indication of where markets are sitting on Fed rates. The swaps continue to suggest that the peak of Fed rates would be around 5.40% in the coming months. A 25 basis points rate hike is still likely in July (actually priced as a 99% probability according to the CME Group FedWatch tool), but it is looking increasingly as though this will be the final hike. The two hikes that had been guided previously from the June FOMC are looking unlikely. Furthermore, the timing of the first rate cuts is coming forward too. On the OIS curve, a full cut is priced for May 2024.

Timing the correction in the USD. The USD has been reacting with decisive selling pressure to this re-pricing of FOMC rate hike expectations over the past couple of weeks. This has caused Treasury yields to drop sharply (the 10-year yield has fallen from 4.09% to as low at 4.73%). The US Dollar Index has subsequently struggled and has fallen below crucial support at 100.78 to levels dating back to April 2022. However, there have been signs that the selling pressure on the dollar has gone too far, at least near term. The daily RSI on EUR/USD recently hit 75. Subsequently, there has been a retracement in USD positions, exacerbated today by market reaction to the low reading on the weekly Jobless Claims. However, there is significant resistance on the Dollar Index between 100.78/101.92, where a whole bunch of old stale bulls sit in losses on long USD positions opened this year. Any signs of the rebound in the USD faltering around here will likely be used as a chance to sell once more. This is key for gold because gold and the USD have had a hugely strong negative correlation for over a year now. There was a blip in late June, but since then, the correlation has re-asserted. Gold has been rallying as the USD correction has set in over recent weeks. Note how the rally has stalled as the USD has rebounded in the past couple of sessions. This chart tells me that the direction of the USD remains crucial to the outlook for gold.

Gold futures are building a recovery. Just as the downtrend on Gold futures defined the price move throughout May and June, a new uptrend is starting to take hold. A run of higher lows has formed a two-week uptrend. The recovery is now assured yet, but every time a new higher low is posted, the outlook for recovery builds further. The market has turned lower today and it is interesting to see the price pulling back from the key resistance at $1983 (an old key lower high and also an important Fibonacci retracement level). However, if the futures can hold up and post another higher low above the now rising 21-day moving average, or ideally above the reaction low at $1946.60, then the recovery will continue to build. However, the key moving forward will be a closing break above the resistance at $1983. Only that would truly turn the move bullish and open the upside potential. If there is continued failure under $1983 then the market will turn into a consolidation rectangle with a neutral medium-term outlook.

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