The Gold market finally displayed some strong price movement in the past days and broke out of the sideways range it was moving within for the past several weeks. As always, a remarkable price movement in the Gold market is accompanied by some new unexpected economic data that tend to point to further uncertainty in the short term. In this report we will provide a brief and informative outlook of the current fundamentals surrounding the Gold market along with a short technical analysis indicating important levels for traders to work with.
We start by pointing out that Gold made its biggest daily movements on the 10th and the 13th of June. These daily moves consisted of large swings that surpassed $50 throughout the session carrying out extensive volatility. On the 10th of June we received the US CPI and core CPI rates for May, an event we had cautioned about in our previous week’s report. Unanimously all the inflation rates for May came out higher than expected possibly creating chaos among market analysts and traders. It is noteworthy that the headline CPI rates came out higher than the previous month’s, yet the core rate came in lower.
As the core rate excludes food and energy prices, we could say that the drastic increase in headline rates can be attributed to higher fuel prices with energy prices moving higher in consecutive months. Nonetheless, traders first reaction to the news was positive pushing Gold prices higher. Additionally, after the Inflation data was released, the Preliminary UoM consumer sentiment for June unexpectedly indicated a large drop, possibly magnifying the market’s reaction. In our opinion, the combination of the two readings tended to invite a significant bullish interest for Gold, as higher inflation rates can bring out Gold’s ability to be used as a hedge for higher prices while the consumer sentiment reading somewhat increased the economic worries with its notable drop. The outcome goes to say that when a number of important economic releases are expected on a single day, Gold traders may have to be patient to wait and see the overall outcome of the indicators and then form a decision as to the direction of the trade.
Moreover, characteristic was also the strengthening of the USD in the past days. According to the Dollar Index the greenback surged for the past 4 consecutive days and was lifted to a new multi-year high price on the 13th of June. As you may have noticed in the past, a bullish US dollar tends to be a weakness for the Gold market, most of the time. With the USD’s power surging, the Gold market performed its biggest single day selloff in months, highlighting its vulnerability to the correlation of the two instruments.
As to the question, why is the greenback on the rise? We must note that the higher inflationary pressures observed just days ago are a very positive sign for the currency also. Higher inflation can point to higher wages and a tight job market which overall favors the USD and is currently very present in the US economy.
In the following days, traders will turn their attention to the FOMC meeting on the 15th of June, which is also the most important economic event of the current week. The FED is expected to increase its interest rate, but the question is how much? The market is now considering a 75-basis-point hike at the Fed’s June meeting, which can leave the markets in an uncertain position until the very last moment. Traders should keep in mind that the FOMC meeting consisting of the interest rate announcement and the accompanying press conference can create immense volatility not only for the Gold market, but also across the board. In this case caution is advised. In addition, we would like to note the weekly initial jobless claims figure coming up on the 16th along with the Philly Fed Business Index for June. Please note on the same day we expect Central bank interest rate decisions from the BoE and the SNB which could intensify the markets anticipation. On the 17th of June we also have a speech from Federal Reserve Chair Jerome Powell and BoJ’s interest rate decision.
Technical Analysis
After the recent selloff on Monday, Gold managed to drop outside the area it had been trading within for the past weeks and momentarily tested the (S1) 1810 support level. However, the price action bounced off the level and moved higher possibly locking in the area between the (R1) 1845 resistance and the (S1) 1810 support as the most probable for the price action to move in for the short term. If the (S1) is breached, then we could be in for a move to the (S2) 1785 support which was approached once for the past several months. If the price action moves upwards, we could see the (R1) 1845 resistance coming under pressure while the level we have in mind for a move even higher is the (R2) 1880 line which was approached on the 13th of June but not clearly tested. For extreme bullish scenarios we note the (R3) 1910 resistance while in an extensive bearish scenario we note the (S3) 1760 support. The RSI indicator has dropped towards the 30 level but regained some ground, indicating the market is still under the selling spell from the previous day. In the scenario of a move above the (R2) 1880 resistance, we would change our current sideways bias for a buying one.
