Gold Bulls Return As Bearish Cloud Descends Over USD

Gold bullion is currently trading at $1,234.77 per ounce, up 0.67% or $8.17 (July 17, 2017). The precious metal slipped from $1,272.80 per ounce on 14 June, on the back of weakness in US economic data releases. However, recent trends in the gold price indicate significant bullish momentum with the precious metal since early July. One of the factors driving the higher gold price is weakness in the USD. On Monday, the greenback hit fresh new lows against its trading partners as the prospect of further rate hikes in the US declined.

Crosshairs on the USD

On Friday, 14 July, the greenback faced a fresh barrage of assaults on the currency markets. June retail sales figures and inflation levels disappointed, and this led to a selloff of USD. Headline inflation plunged more than forecast, and retail sales reversed course. Naturally, sentiment towards the USD declined. Presently, the US dollar index is trading at 95.10, fractionally higher than the 52-week low of 94.08. Over the past 5 days, the US dollar index (DXY) is down 1.01%, and for the year to date it is down 7.12%.

Surprisingly, the USD held its ground against the EUR and the GBP, despite weakness in manufacturing. According to the Empire State Manufacturing Index, a reading of 9.8 was reported, while economists were expecting a figure of 15. This naturally has a negative impact on the USD, which is surprisingly good for gold. Since bullion is a dollar-denominated asset, demand moves in the opposite direction to the strength of the USD. With weakening sentiment about the USD, foreign buyers of gold can purchase more per unit of their currency. Plus, the perceived weakness of the USD drives traders to gold bullion.

FedWatch Tool Signals Drive Bearish Sentiment on Greenback

With softness in inflation figures, members of the Federal Open Market Committee (FOMC) are reluctant to move forward with additional interest rate hikes. It is more likely that the Fed will opt for an unwinding of its $4.5 trillion balance sheet than more rate hikes this year. Janet Yellen, Fed chair, recently pointed to, ‘… more going on.’ in the US economy than mere softness in inflation. It is somewhat concerning to economists and analysts that retail sales figures are down.

The latest economic data releases bring the prospect of a Fed rate hike into question. According to the CME Group FedWatch Tool, there is a 3.1% probability of an interest rate hike on Wednesday, July 26, 2017. For September 20, 2017, the probability of a rate hike is just 8.2%, and for November 1, 2017 the probability of a rate hike is just 11.6%. These economic forecasts are good for gold. Every time the Fed pushes back the prospect of a rate hike, currency traders take a bearish perspective on the greenback. This drives gold demand.

Where to Next for Gold?

By Monday, 17 July, the greenback was trading near 10-month lows. Further, news reports of improved economic performance in China sent investors scampering away from the USD towards other assets. Safe-haven assets such as gold, silver, platinum, the JPY and emerging market currencies gained favour as the USD retreated. Stern Options trading expert Bradley Green explained why gold rose sharply midway through July, “… It is clear that the US economy is not performing as expected. This naturally dampens expectations and results in weakness for the USD. When traders get antsy, they rush towards safe-haven assets such as gold bullion, and this is precisely what we are seeing now.”

Traders’ appetites for risky assets increased sharply as the USD retreated. It seems as if gold could break above the 200-day MA, in which case it would hold above $1,230 per ounce, towards $1,250 per ounce. These are short-term projections, but the bounce in the gold price looks relatively strong. Gold wasn’t the only asset that rose with a weak USD; platinum hit $922.80 per ounce, and Silver was trading above the critical $16 per ounce level.

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