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Gold slips on stronger dollar


1 September 2022

The precious experienced extensive safe haven outflows during the past week, as investors reassessed Fed Chair Powell’s hawkish comments last Friday at Jackson Hole which fueled dollar’s strength as a consequence. In this report we aim to shed light on the catalysts driving the precious’ price, assess its future outlook and conclude with a technical analysis.

Fed Chair Powell’s hawkish speech 

Following the highly anticipated Jackson Hole annual conference, Fed Chair Powell’s speech struck a hawkish tone, stating loudly and proudly that the Fed will continue to aggressively hike rates in an attempt to ease the stubbornly high inflation, acknowledging the fact that their forced actions might in turn, tip the economy into a recession. Not only that, but the comments also indicated that the rates are to remain elevated for the greater part of 2023, stressing the fact that a premature pivot towards rate cuts, may rekindle inflation. Even though neither the pace nor the magnitude of the rate hikes was explicitly discussed, the markets nonetheless appeared to have received the Fed’s message, as we saw the dollar strengthen on the back of the hawkish comments. 

Minneapolis Fed President Kashkari expressed his content in a recent speech in regards to the markets finally digesting the narrative and reacting “appropriately” to the intents of the Fed, indicating the convergence of market perspective to the bank’s intentions. The speech practically erased any hopes of the market for a dovish pivot on behalf of the Fed which in turn hit US stock markets hard, igniting a widespread selloff since the monetary policy is to continue to tighten. Moreover, we also saw gold’s negative correlation with dollar come into play, igniting outflows from the shiny metal.

Even though gold is considered to be a safe bet during times of economic uncertainty, interest rate hikes increase the opportunity cost of holding the bullion. At this point we would like to highlight that US bond yields seem to be on the rise, thus poising an attractive alternative to the non-interest bearing yellow metal. In our assessment gold will continue to be driven by sentiment in the dollar in the short term and odds for gold raising to previous high levels dimmish given the current state of things. Currently, the FFF implies a 70% probability for a 75-basis points rate hike in the September meeting, with the market looking ahead for both inflation and employment reports prior to the decision.

US Employment data due Friday 

Hence, we would also like to highlight the release of the employment report for August due out this Friday, which will give a status update on the health of the US labour market force and the Fed officials will be looking closely, assessing whether the tightness of the employment market allows the pondered rate hikes to take place. According to forecasts, the non-farm payrolls figure is expected to drop to 300k compared to the outstanding 525k figure of the previous month, the Unemployment rate is expected to remain stagnant at 3.5% and the month-on-month Average Earnings figure is expected to drop to 0.4% when compared to the 0.5% of the previous month.

Should the actual rates meet the expectations, we may see the dollar coming under pressure as the figures indicate loosening of the tightness of the US labour force, however the stabilization of the unemployment rate at relative low levels might give the Fed confidence to continue down the path of aggressive rate hikes.

Moreover, the slowdown of the average earnings growth rate could indicate that the inflationary pressures are still present in the economy, diminishing the purchasing power of US consumers and could give extra incentive to the Fed to march on. Also of material importance are the weekly initial jobless claims figure released a day prior to the employment reports of Friday.

ECB’s comments took market by surprise 

On another note, European Central Bank policy maker Isabel Schnabel also made the case for a more aggressive response against inflation at Jackson Hole, stating that the ECB is contemplating the scenario of a 75-basis points rate hike in the September meeting, which caught the market by surprise and could have also contributed to the bullions’ price deterioration seen in the past few days.

To conclude, as the dollar remains elevated near its 20-year highs, supported by widespread fears of economic recessions across the world, elevated energy costs, persistent inflation and the prospect of high interest rates for prolonged periods of time, we hold the view that gold will continue to fall out of favor by investors and in contrast the inflows towards the world’s reserve currency may be sustained.

XAUUSD H4 Chart

XAUUSD H4 Chart

Looking at XAUUSD 4H chart we observe the descending trendline initiated on the 15th of August, highlighting the downward trajectory of the bullion. In our assessment the dollar’s strength is what caused the price of gold to drop to 1-month lows alongside the hawkish comments made by Fed Chairman Powell at Jackson Hole last Friday, the 26th of August. We hold a bearish outlook bias for the precious metal’s price action as indicated by the descending trendline. Also supporting our case is the RSI indicator below our 4-hour chart, which currently points to a reading of 40, confirming the bearish sentiment surrounding the precious.

Furthermore, worth pointing out is the death cross formed on the 17th of August, where the 100 period moving average crossed below the 200 period moving average, reflecting gold’s current price weakness. Should the bulls take over and for us to change our assessment, we would require seeing the break above the descending trendline, the break of the 1750 (R1) resistance line and the definitive move near the 1772 (R2) resistance level.

Should the bears continue to reign over, we may see the break below the 1723 (S1) support line and a move near the 1700 (S2) support line, a level once seen before on the 21st of July. Please note though, that for the bearish outlook to be maintained we would require the next trough to be below the 1723 (S1) support line, marking the latest low point of the price action.

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