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Gold edges higher as dollar eases


5 October 2022

Gold prices climbed to $1700 level earlier today, with the precious extending its short-term rally, after bond yields’ recent sharp fall and the easing of the dollar from its new 20-year highs. Furthermore, the scheduled speeches by various Fed officials at a first glance appeared insufficient at boosting the dollar higher, despite their hawkish tone, and the market currently awaits patiently for the employment data due Friday. In this report we aim to shed light on the catalysts driving the precious metal’s price, assess its future outlook and conclude with a technical analysis.

Worse than expected US manufacturing data cools the dollar

The greenback retracted further from its highs yesterday, after the softer than expected ISM manufacturing PMI results heightened the fears that the US manufacturing complex recent slump has fallen victim to the Fed’s aggressive intents, thus posing the question as to whether the Fed will take its foot off the pedal. The unexpected markdown of the key metric pointed to a slowdown of the US factory growth, knocking the dollar back from its 20-year highs. Not only that, but the recent sharp fall of the US 10-year treasury yield from its highs, also weighed on the dollar and gave room for the precious to rally after a period of sustained devaluation. The fall could indicate that investors doubt that the central bank will be able to continue to tighten the monetary policy aggressively, since there are signs that the economic activity is slowing down.

Another factor contributing to the cool off of the greenback was the resurgence of the sterling from its all-time lows, after a tumultuous last week, where we saw the market’s negative reaction to the UK announcement of the mini-budget, the Bank of England’s liquidity operations announcement amidst a tightening cycle, seeking to purchase long dated gilt bonds in an attempt to safeguard the anemic pound, and yesterday’s U-turn from the UK government, maintaining its top income tax rate after public backlash.

All things considered, the dollar sustains its role as the go-to safe haven asset, for the time being and gold’s run may be short lived in our assessment. The next catalyst that may indirectly influence the value of the bullion is the employment report expected to hit the markets this Friday, which will be of interest for the Fed since it falls under its scope for maintaining tightness in the US labour market.

Fed envoys call for more rate hikes

During a speech yesterday, New York Fed President Williams stated that even though some marginal signs of inflation cooling have been observed, the underlying price pressures faced by consumers remain elevated, hinting that the Fed still has much more work to do in order to restore price stability within the market.

“Clearly, inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential” noted Williams, highlighting at the same time the Fed’s steadfast approach at raising rates with an aggressive manner in an attempt to curb inflation, even at the expense of tipping the economy into a recession.

There is an ongoing divide between market participants as to whether the Fed will seek to continue with another jumbo 75 basis points rate hike in the November meeting and currently the FFF imply a 66% probability for such a scenario to materialize, noting however that leading to the decision, the market will have to grapple with the highly anticipated employment data results for September, which are due this week, and an inflation print expected in the next week. Nonetheless, we also feel the urge to note today’s scheduled speeches of Dallas Fed President Logan, Cleveland Fed President Mester, San Francisco Fed President Daly and Atlanta Fed President Bostic all of which will be monitored for any deviation from the main narrative. Should the speeches continue to deliver the as expected hawkish undertone, we would expect seeing support for the dollar and gold to remain prone for downside due to their inherent negative correlation.

XAUUSD H4 Chart

XAUUSD H4 Chart

Looking at XAUUSD 4H chart we observe the bounce from its year-to-date lows on the 28th of September, rallying towards the $1700 level where it is currently found trading. Given the recent run we hold a bullish outlook bias also due to the ascending trendline and supporting our case is the RSI indicator below our 4-hour chart which registers a value of 69 highlighting the strong bullish tendences surrounding the precious. We must note however that gold’s move may be due a correction given the recent break of the upper Bollinger Band and the RSI reading crossing above the 70 overbought threshold. Should the bulls maintain control, we may see the break above the 1712 (R1) resistance level and the move near the 1734 (R2) resistance barrier. Should the bears take over, we may see the break below the 1687 (S1) support level and the price action moving closer to the 1660 (S2) support base.

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