- The likelihood of a 50 basis point interest rate hike increased after Fed Powell’s comments at the IMF meeting.
- The focus is on preliminary EU and US PMIs for new trading opportunities.
- The wick of the daily candle for the price of gold serves as a compelling bearish feature for the days ahead.
Gold (XAU/USD) rebounded strongly after hitting a low of $1,945.97 during the Asian session. The precious metal is trying to break its crucial resistance at $1,954.16 as the US Dollar Index (DXY) posted a subdued performance in early Tokyo. Although the precious metal presents itself as stable, its fundamentals do not favor the same.
Federal Reserve (Fed) Chairman Jerome Powell’s speech at the International Monetary Fund (IMF) meeting sounded extremely hawkish. The dictation to drive interest rates into a neutral state at a much faster pace has brought forward sharp hawkish guidance from the Fed’s top official. A 50 basis point (bp) rate hike in May is very much on the cards, and the Fed’s determination to reduce liquidity in the economy will force it to come up with more than one giant rate hike this year.
Meanwhile, the US Dollar Index (DXY) is comfortably established above 100.00 amid very likely expectations of aggressive Fed policy. Going forward, the release of the S&P Global Composite Purchase Managers Index (PMI) in the New York session will be important. A preliminary reading at 58.1 shows an outperformance from the previous print of 57.7.
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The price of gold resumes its downtrend, looking to retest the $1,935 demand zone, as the US Dollar holds onto its recovery gains amid firmer Treasury yields. The dollar’s rally accelerated after Fed Chairman Jerome Powell suggested aggressive tightening, citing that a 50 basis point rate hike in May remains on the table. Benchmark 10-year Treasury yields rebounded toward the key 3% level on hawkish rhetoric, providing extra legs for the dollar’s recovery.
The positive real interest rate was another headwind for the yellow metal. “However, we expect investors to focus on geopolitical situations and associated economic risks. ETF flows continued to be strong, with total holdings hitting a 14-month high of 106.6 million ounces,’ analysts at ANZ Bank said.
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Meanwhile, the price of gold also remained undermined by rising eurozone yields after German Bundesbank President Joachim Nagel joined a chorus of policymakers in saying the ECB could raise interest rates at the start of the third quarter.
Money markets, which had eased bets on rate hikes after last Thursday’s ECB meeting, are now pricing in a 20 basis point (bp) hike by July and more than 70 bp of tightening by the end of the year. This would take benchmark interest rates above zero for the first time since 2013 and provides support for the Euro which is weighing on DXY which printed a low of 99.818 on Thursday.
Attention now turns to a set of preliminary manufacturing and services PMI reports from the Eurozone, as well as the United States for further trade impetus.
Gold Price Technical Analysis
On an hourly time frame, XAU/USD has formed a double bottom chart pattern, signifying a bullish reversal in the absence of high volume sellers while retesting the critical bottom. Gold prices rose sharply after successfully retesting Wednesday’s low at $1,939.31. The Relative Strength Index (RSI) (14) defended itself from slipping into the bearish range of 20.00 to 40.00. Additionally, the precious metal has settled above the 20-period exponential moving average (EMA), signaling further gains to come.
Gold Price Hourly Chart
On the other hand, the formation in W could be problematic and a rest of the neckline could be in order:
Additionally, the daily wick and bearish close is a bearish formation that could give rise to an easing of the price imbalance from the early April rally for a test in a deeper demand zone:
On the other hand, the M formation is also compelling on the daily chart and if the bulls were to switch to hourly support, one would expect the neckline to pull the price.