Gold prices continued to recover on Tuesday, buoyed by a weaker US dollar, which came under pressure following news that the Republican healthcare bill was probably going to be rejected by the Senate. This implies that Trump’s tax reform agenda may be now more difficult to implement and may take longer to arrive, as the cuts in healthcare were expected to finance some of the promised fiscal measures.
Meanwhile, Fed rate hike expectations remain subdued in the aftermath of last week’s disappointing US data, with market pricing suggesting less than 50% probability for another hike this year.
Combined, these factors make us believe that the greenback could remain on the back foot over the next few days, especially given the absence of any Fed speakers or major US economic indicators this week. Therefore, we think that gold prices could remain supported for a while, even in the absence of any risk-off news.
XAU/USD traded higher on Friday, following the disappointing US data, breaking above the downtrend line taken from the peak of the 7th of June and the resistance (now-turned-into-support) hurdle of 1228 (S1). Even though such a break would normally change our short-term view to positive, the fact that the yellow metal is still trading below a prior uptrend line drawn from the low of 27th of January makes us hesitant to trust further advances.
We would like to see a decisive move above the crossroads of that uptrend line and the resistance barrier of 1240 (R1) before we become confident that the latest recovery will continue. A potential upside break of that area could initially aim for our next resistance area of 1248 (R2).
Switching to the daily chart, we see that gold has been trading in a sideways range since the end of January, between the 1200 and 1300 territories. The fact that the latest recovery in prices began from near the lower bound of that range increases the likelihood for further upside extensions in our view, perhaps towards the upper bound of the range.
However as we already noted, we prefer to wait for a clear break above the aforementioned crossroad before we turn our eyes higher.
