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Gold pressured by stronger dollar


7 September 2022

The precious metal continues to be under pressure, as the dollar relentlessly surges to new highs, on the back of an aggressive stance adopted by the Fed and other central banks, the prospect of elevated interest rates for prolonged periods of time, deepening energy crisis and widespread fears of economic slowdowns across the globe. In this report we aim to shed light on the catalysts driving the precious’ metal price, assess its future outlook and conclude with a technical analysis.

Energy crisis in the European continent deepens

Following the recent headlines that Gazprom is set to cut gas flows from the key Nord Stream 1 pipeline to Europe, as a retaliation tactic, after G7 members announced the price capping of oil, the European continent is found in dire straits once again. The shut down of Europe’s major supply route stoked fears of a recession in the region and painted a grimmer picture for the impending winter for European consumers, who are to be hurt particularly hard by soaring energy prices. Not only, the worsening energy crisis and the supply shocks could cause the European continent to fall into deeper recession problems, but also the persistent inflation could force the ECB’s hand to proceed with a jumbo rate hike, as it was explicitly expressed at the Jackson Hole conference last month.

Currently, the EUR OIS implies a 95% probability for a 75-basis points rate hike by the ECB for the September meeting which is set to take place on Thursday the 8th of September, indicating that the market sees the aggressive rate hike as a done deal. Both matters in the European continent could drive demand for gold higher as uncertainty on the one hand favors gold, yet we would like to note that ECB’s possibly outsized rate hike could take some of the shine from the greenback thus favoring gold’s price.

Fed’s envoys set to speak

We would also like to highlight the scheduled speeches of Cleveland Fed President Mester, Fed Vice Chair Brainard and Fed Vice Chair for Supervision Barr tomorrow Wednesday the 7th of September who are expected to provide valuable clues as to the Fed’s approach ahead of the highly anticipated September meeting. Moreover, Fed Chair Powell is set to make an appearance on Thursday the 8th of  September and his speech will be monitored by investors as the comments can could bear significance and may cause turmoil in the markets.  Following a fresh round of favorable employment data last week, indicating that the US labor force appears healthy and able to create new jobs, as well as having a relatively low and stable unemployment rate, analysts in particular await the Fed Chair Powell’s input.

Overall, the hawkish narrative is expected to be showcased once again, since the employment report results, point at a rather resilient labor market which in turn allows the Fed to solely focus on curbing inflationary pressures and attempt to prevent inflation becoming deeply entrenched within the economy. As a result, we may see the dollar remain elevated at its 20-year highs and gold to continue its underperformance due to their negative correlation.

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’s price. We hold a bearish outlook bias for the precious metal’s price action as indicated by the descending trendline. The RSI indicator below our 4-hour chart, currently points to a reading of 48, implying some indecisiveness on behalf of the market, surrounding the precious following the failed attempt to break above the 1727 (R1) resistance level. 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 1727 (R1) resistance line and the definitive move near the 1750 (R2) resistance level.

Should the bears continue to reign over, we may see gold’s price break below the 1695 (S1) support line and a move near the 1678 (S2) support base, a level once seen before on the August of 2021.

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