Gold Price Forecast: XAU/USD bulls are accumulating on the backside of key bearish trendlines
- The tide could be going out on the greenback with speculation of a less hawkish Fed.
- Gold is poised for a significant correction, setting up for next week's Fed.
The gold price is higher by some $1,654 on the day following a switch up in confidence in the Federal Reserve's path of interest rate hikes given the cracks in the economy. Consequently, fixed income has seen a rally, sinking yields and the US dollar along with it. Gold has benefitted as the move in the greenback makes it less expensive for buyers of gold.
The dollar index, DXY, which measures the greenback vs. a basket of currencies fell to a low of 110.759 on Tuesday from a high of 112.127 in a sizeable drop that led to strong and rapid gains in risk assets and forex. The index is now below the 111 mark, a level not seen in almost three weeks, as speculation that the Federal Reserve would slow the pace of interest rate hikes later this year has diminished the greenback's appeal.
US stocks and risk have climbed following weaker consumer confidence and manufacturing readings. The Dow Jones Industrial Average climbed to 31,805, with the S&P 500 up 1.1% and the Nasdaq Composite 1.5% higher. The 10-year yield sank to 4.052%, and the 2-year rate dropped 4.398%.
In data, the Conference Board's measure of consumer confidence dropped to 102.5 in October from 107.8 in September. This came in below the 105.3 expected and was the weakest since July. Meanwhile, the Richmond Fed's monthly manufacturing index fell to minus-10 in October from 0 in September, below expectations for a decline to minus-5. The Philadelphia Federal Reserve Bank's monthly nonmanufacturing activity index fell to minus-14.9 in October from 2.5 in the previous month, indicating a sharp contraction in the sector. All in all, this is accompanying poorer data of late and shaking the foundations for continued aggressive tightening expectations from the Fed ahead of next week's expected 75bps hike.
Big moves in the greenback
The moves in the US dollar have stemmed from, 1) Bank of Japan's suspected intervention through the Ministry of Finance, 2) arguably due to the pronounced selling activity in the greenback against the British pound as investors welcomed Rishi Sunak as the new UK prime minister, and 3), last Friday's Wall Street Journal article, entitled, ''Fed Set to Raise Rates by 0.75 Point and Debate Size of Future Hikes''.
However, some analysts would argue that it is too soon to expect the Fed, and other banks for that matter, to pivot. ''Notably, despite the recent move lower in natural gas prices longer-term market-based inflation expectations continue to creep higher,'' analysts at Danske Bank wrote in a note. ''In our view, that highlights that it is still too early for central banks including the Fed to turn into a more accommodative mode since this risks jeopardizing the fight against higher inflation.''
In any case, markets are thinking twice with regard to next week's hike, positioning for a possible hike of less than 75bps. Moreover, speculators switched to net short positions of 20,633 contracts in COMEX gold in the latest week, as per the U.S. Commodity Futures Trading Commission (CFTC) data on Friday. This leaves the market wide open for a capitulation of shorts should we see a less hawkish Fed next week.
Gold technical analysis
As for the technical outlook, we had a break in daily structure back on Oct 3 to take the gold price on the back side of the daily trendline resistance. The price moved back into Wednesday 22 Sep bullish peak formation lows in a micro daily bear trend. We have broken on the backside of the micro (secondary) daily trendline on Fri 22 Oct and we have two inside days including today so far. This could be the formation of an inverse head and shoulders for a 200% measured move of this week's inside range so far to target last month's highs of near $1,735. A break of and close above the $1,670 neckline could be the trigger point to start looking for the set-up on lower time frames.