Turbulence persists in the global economic scene and investors scramble to assess the future prospects of the bullion, as the rising tide of contagious inflation, recession fears and geopolitical risks continue to lash relentlessly onto the markets. In this report we aim to shed light on the events of the recent past and upcoming events that are of crucial importance for the future development of the precious, as well as a technical analysis of assessing its potential short-to-medium horizon.
Even though, XAU/USD fell to the $1,700 per ounce during last week, a level once seen before in August 2021, it held steady above the 11-month low level, attempting to consolidate. The plunge of the precious to the prementioned level above, could partly be explained by the speculative news, circulated around the prospect of 100 basis points rate hike from the Fed. Market expectations therefore, nudged the dollar to new highs and weighted down on the bullion. Even though, we await the official decision, which takes place on July 26th, the market rushed nonetheless and priced in Fed’s potential monetary policy change. Atlanta’s Federal Reserve President Bostic during an interview last week, warned cautiousness and stated that “moving too dramatically will undermine a lot of the things working well”, favoring the decision of 75 basis points rate hike, rather the 100. Bostic’s main concern is that, hiking too aggressively in an attempt to cool off inflation, could potentially tip the economy into a recession. Contradicting Bostic’s view was Fed’s Governor Waller who stands by the FOMC’s 75-basis points decision for July but was, according to a Bloomberg interview, open to a 100-basis points rate hike, if the data justifies such action. This comes after the unprecedented surge of inflation, with the YoY CPI rate figure reaching the 9.1% level, marking four-decade highs. We should note also that FOMC’s Brainard is scheduled to speak later today, 19th of July, and could hint where she leans. Should Brainard’s comments be hawkish, then we might see the greenback getting a boost and in consequence suppress gold’s price.
Noteworthy, is that also the negative correlation of gold with the greenback has broken, as the dollar dropped during the past three sessions against a number of its counterparties, while the precious remained rather stable, which leaves us with the question, what other factors may influence gold’s stability.
However, the underperformance of stock markets and bonds, in tandem with geopolitical uncertainty and fears of a recession, might reignite demand for the bullion, serving as hedge for investors. The time for the yellow metal may come, when the rampant inflation gets tamed and markets transition towards a stagflationary cycle, reestablishing its status as a safe haven.
As the key fundamental drivers of gold’s price appear to be relatively unchanged in recent weeks, our assessment of the short-term development of gold points towards sideways price action, unless a material change of those drivers takes place.
Technical Analysis
XAUUSD H4
Looking at XAUUSD 4H chart we can observe its downward sloping trend initiated on the 5th of July
Looking at XAUUSD 4H chart we can observe its downward sloping trend initiated on the 5th of July, where it broke below the $1800 mark plunging lower, finding support on multiple occasions at the $1695 (S1) support level, an area once visited before in April 2021. Having said that, we maintain a sideways outlook bias for short-term horizon as gold experienced prolonged devaluation and a correction is due, in our assessment. Supporting our case, the RSI indicator below our 4-hour chart, which currently hovers near the 50 level. Also, worth pointing out, is the price action taking place on the midline of the tightening bands, which showcase a decrease in volatility. Should the bulls reign over, we might see a definitive break of the descending trendline, followed by the break of the $1745 resistance (R1) line and a move close to the $1772 (R2) resistance barrier. Should the bears take over however, we would require seeing a break below the $1695 support (S1) line and a definitive move towards the $1670 support (S2) level.
