Gold Bounces as Inflation Cools and US Retail Sales Disappoint
Are New Highs in Store?
In HYCM’s recent coverage of gold we focused on the sell-off following May’s highs, and attempted to identify price levels that could suggest further downside, or alternatively a bounce to higher-highs.
In June, we identified the 38.2% Fibonacci retracement at around $1905 as an important level, suggesting that if gold held it as support, it would add strength to the case that the recent sell-off was healthy consolidation, rather than a more concerning change of trend from bullish to bearish.
For the moment, it appears that the 38.2% retracement level is holding. Gold has tested it as support and subsequently bounced to new daily and weekly higher-highs. In the process, it has also broken above the 23.6% retracement level, with only the $2000 psychological level, May’s peak, and the asset’s 2020 all-time high now remaining as obstacles.
The Story So Far
Gold rallied to around $2090 per ounce in 2020 during the pandemic as a safe-haven. It subsequently fell back down following an unprecedented injection of fiscal stimulus, which led to a boom in risk assets.
Gold bulls returned in 2021 as inflation fears surfaced while the Federal reserve was still regarding the situation as transitory. It peaked early in 2022 with the commencement of the Ukraine conflict and sold off as the Federal Reserve commenced an aggressive rate hiking cycle in order to tame inflation.
Between late 2022 and early 2023 gold rallied again in expectation of a pause from the Federal Reserve. The Fed being closer to the end of its tightening than the start, it slowed the pace of its hikes and finally did pause in the June 2023 meeting, which has reignited interest in the yellow metal.
We have observed this same interest in our own investors, with gold being one of the HYCM’s most traded asset in 2022 and 2023.
What’s Boosting Gold Prices?
On the daily chart, following what appears to be a double-bottom at around $1915, gold experienced two sharp moves higher on Wednesday July 12, and Tuesday July 18. Each move saw gold closing around 1.2% higher, following key US economic data.
The June 12 data that exerted the most impact on gold prices was undoubtedly the CPI report for June, which showed inflation cooling to 3% on an annualised basis. This has markets betting on another pause from the Fed in its July 26 meeting, with more aggressive market participants expecting a cut from the Fed by year end, even though it has given no such indication.
On July 18, monthly retail sales data disappointed, suggesting that the US consumer is not in as strong a position as was previously thought. Core retail sales came in at 0.2%, to the market’s expectation of 0.4%. The broader reading also came in at 0.2%, much lower than Wall Street’s anticipated 0.5% figure.
What this pair of economic reports could suggest is that the Fed has finally made some headway in its battle against inflation, and that this headway has come at the cost of consumer strength, which was always an outcome to be expected. Aside from gold’s technical picture, which we’ll focus on below, the above are fundamentals that can be thought positive for gold.
Besides this, we also have US dollar weakness leading to gold strength. The dollar continues to weaken against its major trading counterparts, particularly the euro, as market participants attempt to price in the expected end of the tightening cycle (and perhaps return to rate cuts) taking place sooner in the US than in Europe.
Technical Picture
The most important levels to watch at the moment are the weekly May 2023 high at $1988, and the August 2020 weekly all-time high at around $2046. The fact that weekly highs are often lower than the extremes reached during intraday trading puts these levels within reach of current price action.
Gold futures are currently trading at $1981, which means that May’s weekly high is only $7 away. A weekly higher-high would be extremely positive for the technical picture, indicating a possible continuation higher. This would see the $2000 level coming into play, which is important psychologically and proved to be stubborn for both gold bulls and bears back in May. Importantly, a break above $2000 builds a case for gold being able to test its weekly all-time high in dollar terms at $2046.
On the downside, the range between $1905 and $1920 is important as support, with a break below $1915 possibly invalidating much of the above due to it representing a daily lower-low in price action. Before any such retreat, look for support to be established at the 26.6% retracement level at $1965.
by Giles Coghlan, Chief Market Analyst consulting for HYCM
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This article was originally posted on FX Empire