Gold prices (XAUUSD) are currently treading water, caught between potential upside from dovish central bank policy and downside pressure from a strengthening dollar. Recent comments from the European Central Bank hinting at the possibility of rate cuts in June and July have buoyed gold’s appeal as a safe-haven asset. Additionally, a survey last Friday showed US consumers expecting slower price increases, raising hopes that this week’s key inflation data (core PCE) will confirm a cooling trend. Lower inflation could prompt the Federal Reserve to ease its monetary tightening stance, potentially weakening the dollar and supporting gold prices.
However, this optimistic outlook is countered by a few headwinds. The recent rise in the dollar, fueled by shifting expectations of US monetary policy, has dampened gold’s appeal. While a rate cut remains a possibility, some traders are sceptical that the Fed will cut rates more than once this year. This scepticism is reflected in current market pricing, with a roughly 63% chance of a rate cut by November priced in. As gold offers no yield, rising interest rates make it a less attractive investment compared to interest-bearing assets.
Technical Analysis
On the 4-hour chart, gold is trading slightly lower at $2,343.61 per ounce, following a retracement from recent highs. The price action has seen gold dip below key moving averages, the 50-SMA (blue line) and 100-SMA (orange line), and is currently oscillating around the 20-SMA (green line).
A potential upside scenario could see a recovery towards the 23.60% Fibonacci retracement level at $2,380.90/ounce. A sustained break above this resistance could lead to a retest of the all-time high at $2,450.04/ounce.
Conversely, a breakdown below the 20-SMA and the 38.20% Fibonacci retracement level could trigger a deeper retracement towards the 50.00% Fibonacci retracement level at $2,303.57/ounce. A confirmed bearish breakout, indicated by significant volume, could expose lower levels of support at the 61.80% Fibonacci retracement ($2,269.00/ounce) and the 78.60% Fibonacci retracement level ($2,219.78/ounce).
Summary
The near-term direction of gold hinges on the upcoming US inflation data. A dovish report indicating cooler inflation could reignite hopes of rate cuts and bolster gold prices. Conversely, a hawkish report suggests persistent inflation might lead the Fed to maintain or even increase interest rates, putting downward pressure on gold.
Sources: TradingView, Trading Economics, Reuters, Dow Jones Newswire.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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