Gold Price corrects as US dollar slides on dialled down Fed responce sentiment to inflation

• Gold Price s correcting the weekly and daily impulses. 
• The focus is on the US dollar and the path of the Federal Reserve. 
• The 50% mean reversion and a 38.2% Fibonacci retracement are brought into focus. 

At $1,079.50c, the Gold Price (XAU/USD) has been attempting to correct as the US dollar pulled back slightly as markets weigh the the prospects of a 75-basis-point interest rate hike over a 100bp hike by the Federal Reserve at its upcoming meeting on July 26-27.

In turn, the US dollar has lost some shine to trade back below 107 on Monday as per the DXY index which measures the greenback vs. a basket of major currencies. It was trading as high as 109.29 in a fresh bull cycle high last week. Overall, both the technical and fundamental bias has been to the downside but a correction is in play in both the US dollar and gold. 

To date, within gold's bear cycle, the break in daily market structure and prospects of a strong US dollar as well as higher yields, which gold does not offer to investors, have weighed on the precious metal into pre-pandemic levels. The greenback has tended to strengthen both when the US economy outperforms its peers and also when the US economy looks weak. 

Weighing up the Fed

Fedspeak has pushed back against a 100bp hike from some notable hawks, raising the risk of a near-term short-squeeze on the Gold Price prior to the meeting. However, this could create the perfect storm for a downside continuation in gold on a hawkish outcome from the meeting. 

The Fed has moved into the blackout period before the next meeting leaving prior statements from Fed speakers following the last meeting and to date for the market to chew on. Ahead of the blackout, the Fed’s Beige Book released last week noted that price increases remained “substantial” across the nation in recent weeks, though some regions saw signs of cooling inflation.

Meanwhile, Fed officials implied that nothing was off the table after the CPI report. US inflation surprised once again to the upside in June, both headline and core measures, with annual inflation jumping to a new four-decade high of 9.1%, up from 8.6% in May. Therefore, supportive of global yields and the US dollar as a headline for gold prices, the market expects that the Fed will be in no rush to signal a pivot from its current path of aggressive rate hikes and is pricing in steeper hikes of 100bs pints for not only in July but September's meeting as well. 

At the June FOMC meeting, Chair Powell stated that he would need ‘compelling evidence’ that inflation is easing for the Fed to change course, which he defined as ‘a series of falling monthly inflation readings’. Since then, we have heard from Fed's Raphael Bostic who said “everything is in play” while Mester said there was no reason for a smaller hike. Mary Daly, CEO of San Francisco said 75 bp was her “most likely posture.”

Read more here: Central banks deliver hawkish surprises, what will the Fed do?

The US dollar loses some gloss, supports gold price

The dollar index (DXY) was off its near 20-year high, down 0.6%, making greenback-priced bullion less expensive for buyers holding other currencies. It made a low of 106.892 on Monday which is giving some support to the gold price. Nevertheless, earnings season is upon us. There are likely to be gyrations that could lead to some buying activity in the greenback for its save haven function stemming from its use as an invoicing currency and from the significant amounts of USD-denominated debt issued by non-US residents.

Simply put, in times of uncertainty various market participants take action to secure their access to USDs. In turn, the pull on the gold price is likely to persist, at least until the Fed’s front-loaded policy tightening cycle is near conclusion. 

''There is no way around it, the Fed has an inflation problem on its hands and the USD will continue to remain king of FX,'' analysts at TD Securities argued. 

Gold Price expectations from TD Securities

Gold prices have crossed the threshold for a trend reversal, marking confirmation of a bear market trading regime in the yellow metal, for the time being, the analysts at TD Securities said. Their ChartVision Trend analytics highlighted that a break below the $1821/oz level by September would cement a downtrend in the yellow metal.

''With gold bugs falling like dominoes, prices have since slashed through various support levels on their way towards the $1600/oz-handle. With prices now challenging pre-pandemic levels, the largest speculative cohort in gold will start to feel the pain under a hawkish Fed regime as their entry levels are tested.''

Finally, the analysts argue that considering the latest CFTC report highlights that although a massive amount of longs was liquidated over the past week, the prop-trader cohort continues to hold an extremely large position size.  Therefore, ''in a liquidation vacuum, these massive positions are most vulnerable, which suggests the yellow metal remains prone to further downside still.''

Gold Price technical analysis 

The Gold Price has broken structure on the daily chart but a correction is now in play:

From a weekly perspective, the price could also be regarded as extended and a correction is arguably feasible at this juncture. There are price imbalances as marked in grey in the chart below which could be mitigated in the coming days and or weeks. In doing so, the Fibonacci retracement scale can be drawn up to find confluences in these imbalances to help identify probable areas of interest. This brings in the 50% mean reversion and a 38.2% Fibonacci retracement before then into focus. However, the monthly lows of $1,676.86 as illustrated on the chart below could come within reach sooner than later:

Gold, Silver & Crude Oil Price Forecast: 18 - 22 July 2022