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Gold slips on firmer dollar


19 August 2022

Gold has been facing headwinds since the start of this week, retracting from the $1800 level after recording its fourth consecutive weekly gains, mainly due to the recent dollar strength, after grim data coming from China on early Monday morning, which revived fears of a global slowdown and injected a fresh dose of uncertainty within the markets. In this report, we aim to shed light on the catalysts driving the precious’ price, assess its future outlook and conclude with technical analysis. Let’s dive right in.

Following the outstanding US employment reports for the month of July, where the doubling of the job creation metric as well as the marginal reduction of the unemployment rate highlighted the tightness of the US labour force, intensified market expectations for the Fed to continue to aggressively hike rates its attempt to contain rogue inflation. As a result, we observed the dollar weakening and gold’s price as a consequence, getting a boost due to their negative correlation. Subsequently, last week the US inflation print hit the markets and indicated a better-than-expected slowdown of the inflationary pressures, both on a year-on-year basis as well as on a month-on-month basis and signalling to the Fed that their efforts towards curbing inflation may be effective.

The markets as a result, rushed to reappraise the Fed’s upcoming monetary tightening decision for its September meeting, betting that the Fed might ease the pace and magnitude of the next rate hike, opting out for a 50-basis points rate hike instead of the 75 basis points hinted prior to the CPI releases. This in effect, drove the dollar lower and the precious enjoyed a fresh wave of safe haven inflows aiding its climb to the $1800 level.

However, since then we have heard from a multitude of Fed speakers that, given the recent positive news both on the tightening of the US employment market, as well as the phenomenologically peaking and easing of the July’s 40–year inflation highs, the Fed’s approach towards draining excess liquidity from the market will continue, even at the expense of tipping the economy into a recession.

Tomorrow, we highlight the release of July’s FOMC meeting minutes and Fed Governor Bowman’s speech followed shortly after, looking for clues on what might the Fed’s next monetary policy meeting can yield. It is important to note that, during last week’s press conference Fed Governor Bowman clearly stated that inflation must be brought down to the desired 2% level and following tomorrow’s releases, the market will be looking closely for any deviations in the narrative. On a global level it also worthwhile to keep an eye on how other central banks will respond to the Fed’s decision, as we noticed a mimicking pattern emerging, where other major central banks mirror their rate hikes in an attempt to synchronize with US, since dollar appreciation weighs down on their domestic currencies, causing them to fall behind the curve.

Now the recent retraction of gold’s price from the $1800 level can be attributed to the dollar’s strength after a surprise move by the central bank of China to cut its key lending rates, earlier in Monday’s Asian session in an attempt to revive demand within the Chinese economy following a bad round of data.

The year-on-year Industrial Production figure for the month of July was according to forecasts, expected to reach the 4.6% however the actual figure reported was 3.8%, which was also lower than the previous month’s figure of 3.9%, indicating not only slowdown but also retraction of the industrial sector’s output of the Chinese economy, raising concerns in the market. The grim figures showcase the world’s second-largest economy is struggling to hit its growth targets as the strict zero COVID policy restrictions enforced during the first half of the year appear to have crippled industrial production, but also the post-lockdown recovery plan lost its momentum since opening. As a result, the response of the People’s Bank of China was to step in and support the economy by reducing its key lending rates with the goal being, to stimulate the economic activity within the country and prevent further economic weakness. Adding salt to injury, the year-on-year Retail Sales growth rose to 2.7% in July missing market estimates of 5% and compared to the month of June’s 3.1% it indicating weakness in the internal market demand of the Chinese market.

XAUUSD H4 Chart

Looking at XAUUSD 4H chart we observe the breaking below the ascending trendline initiated since the 21st of July, with the price action however being confined within the 1800 (R1) resistance line and 1760 (S1) support level. Therefore, we tend to maintain a bias for a sideways motion of the precious metal’s price between the aforementioned bounds. It should be noted though, that the RSI indicator below our 4-hour chart fell below the reading of 50, but remains relatively flat just below around the 42 level, which might indicate short term indecision surrounding the precious metal.

Also, worth pointing out is the convergence of the 20 period moving average and the 200 period moving average, and we await for further clues in regards to where the trend might lead next. Should the bulls reign over and for us to change our assessment, we require seeing the break above the 1800 (R1) resistance line and facilitate a move near the 1839 (R2) resistance level. Should the bears take over, we may see the break below the 1760 (S1) support line and a move near the 1723 (S2) support line.

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