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Dollar gains erase fractional increases in gold

Commentaries & Views

Gold is always greatly influenced by dollar strength or weakness. Because gold is paired against the U.S. currency, the dollar is always a major component of price changes. Today extreme dollar strength was the dominant driving force that caused a modest decline in gold pricing.

The dollar has had a trading range of 1.27% from the daily low to the daily high. The dollar index opened at 105.25 today and within the first 4 hours traded to its low of 104.92. As of 4:40 PM EDT, the dollar is trading just off its high of 106.20, currently fixed at 106.19 after factoring in today’s gain of 0.854 points or 0.81%.

Starting in the third week of February, the dollar has been trading above its 50-day moving average which is technical confirmation that the dollar is firmly entrenched in a short-term bullish trend. For the last five months, the dollar has remained above the 50-day moving average and confirmed that support is at the 50-day M.A. on two occasions.

The first occurrence happened on the week of May 30 to June 6, between those two dates gold hit upon the 50-day M.A. and bounced upward from 50-day M.A. confirming technical support. The second instance occurred in trading today with the dollar index trading just 0.016 points above the 50-day M.A.

Our studies indicate that there is support for the dollar begins at 104.516 the 23.6% Fibonacci retracement and 104.904 the 50-day M.A. There is major support at 101.678 the 38.2% Fibonacci retracement which matches the low between May 30 and June 6. The first level of resistance occurs at 107.26, with major ressistance at the dollar's recent high of 109.105 which occurred on July 14.

Gold futures are trading modestly lower today with the most active December Comex contract currently fixed at $1776.20 after factoring in today’s decline of $11.50 or 0.46%. Since the percentage decline in gold is less than the percentage gain in the U.S. dollar it is evident that there is fractional buying with dollar strength overtaking any potential gains.

Gold briefly broke above $1800 trading to a high of $1805 today. However, these gains were short-lived and gold retreated below $1800 and is currently just $0.20 above the low of $1776. In the case of gold, its 50-day moving average is defining the first level of resistance at $1795.20. The next level of resistance occurs at $1800 with major resistance at $1831.30 the 61.8% Fibonacci retracement.

Both dollar strength and weakness in gold are directly tied to statements made by Federal Reserve members today. In an interview with CNBC, Mary Daly, the San Francisco Federal Reserve Bank president said that “the Fed is nowhere near being done in its fight against inflation.” She also said that the central bank will continue to raise rates as much as necessary to bring down high inflation.

“Americans need to know they don’t have to worry about inflation when they wake up in the morning,”

However, Chicago Fed President Charles Evans maintained a less hawkish stance saying that he hoped the “Fed could raise rates at a slower pace later in the year. Yet it would depend on whether inflation begins to slow.”

These statements indicated a less dovish tone than expressed by Chairman Powell recently resulting in dollar strength and today’s decline in gold.

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Wishing you as always good trading,

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