Gold Could Drop as Dollar and Yields Remain Supported
- * Gold outlook dented by high yields
- * Dollar finds support from a weak euro
- * Mixed US jobs report unable to arrest dollar’s bullish trend
- * Gold technical analysis point lower
After a quiet day on Monday when US investors were out on holiday, the markets have already turned a bit more volatile so far in today’s session. We saw European indices fall across the board first thing this morning and in FX, the major currency pairs like the GBP/USD and EUR/USD dropped to their lowest levels since June while the NZD/USD hit a fresh low for the year. Things weren’t looking too promising for gold either, with the precious metal edging lower and looking to follow the footsteps of silver, which was already down nearly 2% on the session at the time of writing. So, while the markets may have started a bit slow on Monday, things should be more volatile with the participation of US investors as we head deeper into the first full week of September. Volatility should pick up from here anyway as more and more investors and traders come back from their summer holidays. There aren’t too many top-tier macro pointers to look forward to this week, so the dollar’s bullish trend is likely to remain intact. This should keep gold under pressure.
Dollar finds support from a weak euro
The dollar index has climbed above its high made in May at 104.70. The greenback has found additional support this week by further weakness in foreign currencies, owing to continued softness in data – in particular, the Eurozone. The euro fell further after the Eurozone’s services PMI was revised lower to 47.9 from 48.3, suggesting that the dominant services sector is starting to follow the footsteps of the manufacturing as high inflation and interest rates bite. On Tuesday, the closely-followed Sentix Investor Confidence, a leading indicator of economic health based on around 2,800 surveyed investors and analysts, fell further into the negative at -21.5 versus -19.6 expected, from -18.9 previously. On top of this, Germany’s trade surplus narrowed by more than expected to €15.9 billion down from €18.7 billion. What’s more, Spanish unemployment unexpectedly rose by 24.8K when a drop of 21.3K was expected. This week’s soft data comes after the German manufacturing PMI on Friday painted a grim outlook for the Eurozone’s largest economy.
Gold held back by high yields
With bond yields still very high, the opportunity cost of holding gold, an asset that doesn’t pay any interest or dividends, is the interest you would forgo by not holding government debt. For large institutional investors, investing in government bonds has been a more attractive proposition than gold. This will be the case until such a time when we have gone beyond the point of peak interest rates and closer to when central banks will start cutting rates again. In the meantime, it is difficult to be too bullish on gold.
Mixed US jobs report unable to arrest dollar’s bullish trend
Bond yields bounced back on Friday after a mixed US jobs report failed to cause a reversal in the current trends. Consequently, the dollar’s bullish trend was unaffected even though the mixed US jobs report boosted speculation that the Fed would be keeping interest rates on hold at the coming meetings. Indeed, money markets imply that rate hikes have finally reached a peak, with the 30-day Fed Fund futures implying a 93% chance of the Fed holding rates steady in September. Although 187K jobs were added into the economy, which was above the 170K expected, the unemployment rate rose to its highest level since February 2022 at 3.8% and average hourly earnings rose 0.2% month-over-month instead of 0.3% eyed.
This week’s key US data is probably the ISM Services PMI on Wednesday, although we will have a few other second-tier data to look forward to as well.
Gold technical analysis
With silver already on the way down, and several major FX pairs hitting multi-month lows today, I wouldn’t be surprised to see XAUUSD follow suit and break lower from here. From a technical standpoint, the precious metal has struggled to find fresh buying momentum after peaking above its bearish trend line that has been place ever since hitting a new all-time high in May. Indeed, gold formed a doji candle on Friday to print a possible bearish signal. The bears needed to see some downside follow-through and this is what we might be getting today with gold now back below the bearish trend line. Thus, a move lower looks increasingly likely, with the bears eying $1900 as a possible first target. Things will turn positive if we see a daily close above the trend at some point this week.
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