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XAU/USD bears are on the move

  • Gold may be on the verge of a significant downside correction.
  • US dollar bulls are emerging as markets digest the Fed speak and inflation data.

Gold prices were flat on Wall Street after a move in the US dollar and yields that shook some weak hands lower in the greenback. The market backdrop has turned more risk-friendly over the past two days, reflecting the yellow metal’s upturn in some growth indicators and the downside of inflationary pressures.

However, at the time of writing, the greenback is moving higher on the 4-hour charts in a solid correction from the inflation blow as markets take some time to look ahead. Thursday’s producer price index sent similar signals to Wednesday’s CPI and fueled hope that the Federal Reserve will be able to cool price growth without plunging the economy into the deep freeze of recession.

July PPI came in lower than expected month-on-month and year-on-year. In fact, the month-on-month reading was actually negative. Core readings were below the Reuters poll on a month-over-month basis and in line year-over-year. The report cut expectations for the Fed up interest rates by 75 basis points for the third time in a row at the conclusion of its September policy meeting. Instead, CME fed funds futures now predict a smaller 50 bp rate hike by about two to one.

Markets also picked up on the latest Consumer Price Index and PPI results, which were below expectations, following comments made by Federal Reserve officials.

Fed officials are stubborn

Fed officials spoke after inflation data this week. For example, following yesterday’s CPI, Neel Kashkari unleashed his inner hawk and said the July CPI data did not change his expected rate path, although he was happy to see the inflation surprise come down. Kashkari stressed that the Fed was far from declaring victory over inflation and that a recession would “not stop me” from reaching the 2% target.

Today, San Francisco Fed President Mary Daly did not rule out a third consecutive 0.75 percentage point rate hike at the central bank’s next policy meeting in September, although she signaled her initial support for the Fed to slow the pace of its interest rate hike. The Financial Times reports that will increase. “We have a lot of work to do. I don’t want to do it so reactively that we screw up the labor market,” said the central banker, indicating that he is watching consumer prices next and not. Farm payroll reports to better calibrate his decision making.

US stocks faded

On Wall Street, heading into the final hour of trading, stocks eased earlier gains as investors figured a month’s worth of data might not be enough to call for peak inflation. As a result, after adding more than 2% on Wednesday and rising more than 1% to a 3-month high on Thursday, the S&P 500 was down 0.1% at 4,207.32 and the Nasdaq Composite was down 0.6% at 12,779.91. The Dow Jones industrial average rose 0.1% to 33,336.67.

The 10-year yield rose 3.41% on the day and made a fresh intraday high of 2.902%. The move coincided with a 30-year bond auction. Meanwhile, DXY, an index that measures the greenback against a basket of currencies, was flat at 105.14 for the day. The index recovered from a low of 104.646.

Regarding the US dollar and in light of yesterday’s CPI data, analysts at Brown Brothers Harriman said, “We emphasize that there is a lot of noise right now, even though markets have been thin during the summer months.”

“We are likely to continue to see violent movements in the markets in the coming weeks as markets continue to struggle to find a stable and sustainable macro outlook to trade from.”

Analysts at TD Securities argued that the recent deterioration in US core inflation underscores that we have seen the peak of inflation and perhaps stagnation concerns. Even so, “they don’t think risk assets are out of the woods yet, suggesting a little more time to expect a sustained, positive boost in growth prospects and economic conditions.”

“A potential inflation peak (and a related end to the Fed’s terminal rate price pursuit) is a key factor in calling a top in the USD. The other important (and arguably more important) factor is the global growth outlook. On that point, we don’t think it’s time to completely fade the USD, although the recent background cuts have put faith in the USD’s long-term exposure,” the analyst explained.

Meanwhile, analysts at TD Securities said gold sellers are lurking.

“Gold’s failure to break the key threshold north of a major short-covering by CTA trend followers amid a miss in highly anticipated US inflation data suggests significant selling interest.” After all, strong physical demand may have fueled the short-covering rally sparked by Chair Powell’s FOMC speech, but we see evidence that the Chinese bid in gold is getting underbid.

“Prices now need to break north of $1830/oz to accelerate a buying program by trend followers. Finally, prop traders still have massive amounts of complacent longs, suggesting that we have yet to see a capitulation in gold, which argues that a painful trade remains for downside.

Technical analysis of gold

As explained, the price has moved up to the 61.8% golden ratio, where some profit-taking is expected. Supply accumulation may increase in the coming days and weeks, resulting in the topping of this correction of the bear leg of the M-pattern.

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