- Gold prices are being pressured around the psychological $1,800 level.
- The US dollar is earmarked by some analysts as a stronger for longer trade-off.
- Gold: Possible correction to $1,800 as key resistance holds
Update: Gold price is pressurizing the lows, flirting with $1800 amid a renewed risk-on wave that has gripped the Asian market, as traders shrug off covid worries for now. The upbeat mood-led advance in the Treasury yields is offsetting a fresh leg lower in the US dollar, keeping gold price languishing in lows. Critical support around $1797-$1795 appears at risk once again, as markets cheer the US stimulus news ahead of the ECB monetary policy announcement. That demand zone is the confluence of the 21-Daily Moving Average (DMA) and 100-DMA. Later in the day, the US weekly jobless claims and housing data will provide fresh trading impetus while covid updates will be closely followed as well.
Read: ECB Preview: Three reasons why Lagarde could hit the euro when it is down
At the time of writing, XAU/USD is trading at $1,803.23 and down some 0.4% on the day after falling from a high of $1,813 to a low of $1,794.66.
The price of gold has rebounded from the lows as the safe-haven dollar pulls back from more than three-month highs, with risk appetite back up with stocks higher.
The S&P 500 is up 0.65% on earnings strength but investors remain cautious due to inflation fears and concerns about the highly contagious coronavirus variant.
In mid-day New York trading, the dollar index, a measure of its value against six major currencies was slightly lower by 0.19% at 92.788 DXY. The high on the day was 93.191. On Tuesday, the index hit a more than three-month high.
Investors remain cautious due to inflation delta which is supporting the greenback on the one hand.
On the other hand, high US inflation is keeping the door open for the Federal Reserve to taper stimulus which is pressuring gold prices as investors seek the carry opportunities elsewhere for which fruits gold does not bear.
Gold positioning
''Money managers only marginally increased their gold length, despite sinking real yields in the US'', analysts at TD Securities explained.
''Indeed, gold prices are still struggling to firm, in spite of the extremely positive price action in real yields which sent US10y TIPS prices back towards their pandemic-era highs,'' the analysts added.
''In contrast, the yellow metal can't manage to break north of its 200dma. This highlights a sharp divergence in capital flows as high inflation prints have kept breakevens elevated, primarily as a function of carry.''
The dollar smile theory
The dollar smile theory could be significantly bearish for gold prices going forward.
As analysts at ANZ Bank explained, ''despite the vaccine rollout, markets do not appear to be embracing the idea of learning to live with COVID-19. Sentiment appears to have shifted, at least for the moment, to persuasion that growth and earnings expectations may be overdone.''
In this respect, the idea of a synchronous global recovery looks full of holes as it did back in January 2020, and the bond market is a good place to start looking for market sentiment.
US 10-year Treasury yields were back to about 1.12% this week before bouncing, to current levels in the highs near 1.3%.
The USD outperformed despite collapsing US yields. The dollar is strong on the basis of both risk-off flows and firm economic data, but more to the point, yields have fallen almost everywhere that matters, not just in the US.
This dynamic would likely persist or even accelerate as the coronavirus fears head towards an apex, whenever that might be, especially as investors continue to move away from EMs.
Real rates were crumbling as growth angst helps nominal yields collapse but as US yields are set to normalise, the negative correlation would be expected to adversely impact the yellow metal for longer.
''Here, gold prices are vulnerable to yet another pullback as gold's persistent weakness against real yields points to a vulnerable microstructure. At the same time, gold's inability to rally despite the ongoing risk-off highlights that speculative flows remain particularly weak, reinforcing the potential for a deeper pullback,'' analysts at TD Securities explained.
Meanwhile, the number of new infections is rising in southeast Asia and most US states as well with the highly infectious Delta variant taking hold.
Yesterday, a new study found that some vaccines may be less effective against the Delta variant, Risk-off: bioRxiv study shows J&J vaccine may be less effective against Delta covid variant, and there lies within prospects for continuous risk-off for the foreseeable future.
The immediate concern for markets is whether we are going to see a slowdown in the global economic recovery.
This could be the overriding force that results in strong demand for the greenback, especially as all current data points to a hawkish theme at the Fed.
''Since the FOMC last met, the labour market, Retail Sales and inflation have all come in very strong. While the rise in COVID cases is a valid concern, there is a risk that the market is becoming too dovish on its expectations for the Fed’s communication next week,'' analysts at ANZ Bank said.
This completes the thesis that the US dollar smile theory is real and a headwind for gold prices for the foreseeable future.
Analysts at Brown Brothers Harriman described the theory as ''strong US data are feeding into increased dollar bullishness as the Fed continues to take tentative steps towards tapering... On the other hand, growing risk-off impulses are helping the dollar recently. This supports the view that the greenback is likely to benefit in either situation. Hence, the smile as the dollar turns up at both ends of the risk spectrum.''
Gold technical analysis
Technically, gold's breakout from its recent trading range may be attracting some interest from technicians, but it has recently taken a turn for the worst, falling below the convergence of the 10 and 20-day EMAs near 1,810 to take on commitments at the 1,800 psychological level:
We have seen a low of 1,794 so far on the day and this would likely be upsetting the bulls.
Meanwhile, from a weekly perspective, the bears could be looking to engage in droves from the 38.2% Fibonacci wall of resistance:
The confluence of the 20 and 10 EMAs, a prior structure dating as far back as summer 2020 bar November's business, as well as the 50% mean reversion makes for potentially strong resistance.
The counter-trendline support and confluence of the -272% Fibo for the current correction's range near 1,730 could come under pressure on a break of the current daily lows of 1,750.
Previous update
Update: Gold (XAU/USD) seesaws around $1,800, recently easing to $1,803, during the initial Asian session on Thursday. The yellow metal dropped the previous day even as the US Dollar Index (DXY) eased on the upbeat market sentiment. The greenback moves were largely affected by Wall Street’s another positive day, backed by strong earnings. The same optimism could be cited for the US Treasury yields positive run for the second day, which in turn seemed to have pressured the gold prices towards the south.
It should, however, be noted that multi-day high covid numbers from Australia, grim conditions elsewhere, joined uncertainty over the US President Joe Biden’s infrastructure spending passage to challenge the market optimism and gold bears as well.
Moving on, gold traders will keep their eyes on the risk catalysts ahead of the European Central Bank (ECB) Monetary policy meeting. Although policymakers are expected to reiterate the status-quo, dovish signs in the statement and press conference may favor USD and weigh on gold prices.
Read: European Central Bank Preview: Fresh forward guidance, old fears
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
![EUR/USD stays below 1.1100, looks to post weekly losses](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/EURUSD/european-euro-coin-on-top-of-american-dollar-bill-11292130_XtraSmall.jpg)
EUR/USD stays below 1.1100, looks to post weekly losses
EUR/USD continues to trade in a narrow range below 1.1100 and remains on track to end the week in negative territory. Earlier in the day, monthly PCE inflation data from the US came in line with the market expectation, failing to trigger a reaction.
![GBP/USD struggles to find a foothold, trades near 1.3150](https://editorial.fxstreet.com/images/Markets/Currencies/Majors/GBPUSD/iStock-157771037_XtraSmall.jpg)
GBP/USD struggles to find a foothold, trades near 1.3150
GBP/USD stays on the back foot and trades in negative territory at around 1.3150 on Friday. The US Dollar holds its ground following the July PCE inflation data and doesn't allow the pair to stage a rebound heading into the weekend.
![Gold retreats toward $2,500 ahead of the weekend](https://editorial.fxstreet.com/images/Markets/Commodities/Metals/Gold/gold-bars-50657756_XtraSmall.jpg)
Gold retreats toward $2,500 ahead of the weekend
Gold stays under modest bearish pressure and declines toward $2,500 in the American session on Friday. The 10-year US Treasury bond yield edges higher toward 3.9% after US PCE inflation data, causing XAU/USD to stretch lower.
![Week ahead – Investors brace for NFP amid Fed rate cut speculation](https://editorial.fxstreet.com/images/Macroeconomics/EconomicIndicator/Employment/NFP/america-back-to-work-gm178972493-25143312_XtraSmall.jpg)
Week ahead – Investors brace for NFP amid Fed rate cut speculation
Here comes another NFP week, with investors eagerly awaiting the results as they try to discern the size and pace of the Fed’s forthcoming rate cuts. The weaker than expected July numbers triggered market turbulence, instilling fears about a potential recession in the US.
![Easing Eurozone inflation to back an ECB rate cut in September](https://editorial.fxstreet.com/images/Macroeconomics/Countries/Europe/Eurozone_countries/Eurozone/eu-flags-flying-at-the-european-commission-building-brussels-belgium-24759579_XtraSmall.jpg)
Easing Eurozone inflation to back an ECB rate cut in September Premium
Eurostat will publish the preliminary estimate of the August Eurozone Harmonized Index of Consumer Prices on Friday, and the anticipated outcome will back up the case for another European Central Bank interest rate cut when policymakers meet in September.
![Moneta Markets review 2024: All you need to know](https://editorial.fxstreet.com/images/IT/Testing/Review/FXSBadgeCertifiedBackg_XtraSmall.png)
Moneta Markets review 2024: All you need to know
VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.