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Gold weakened as expected

Gold chart 08 16

Gold hit my downside target range (1771 – 1775) after breaking a key support level. Weakness in gold emerged just as I expected last week. I’ve been warning about softness in gold bids as the bond market weakness indicated higher yields and a stronger dollar. Now the market is trading at a bull channel low but could now break below the channel. This would be likely to move gold to 1765 or so.   By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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As I want this report to also be an educational tool it’s worth highlighting was I said last week (here): “the market has been wedging and while it’s technically still in an uptrend a wedge like this is a risk factor. It tells you that price advances are getting weaker and increase the probabilities for market reversal. Yesterday’s lower daily high is another warning sign and we should remember that all this price action takes place inside the medium-term target range I talked about in July. T-bonds are weak pushing the yields higher, which in turn supports the dollar. With the USD probably strengthening gold could break the key support at 1783.17. This would open the way to the 1771 – 1775 range.”

DJ chart 08 16

DJ trends higher as the recent positive news has kept the investors in a buy-the-dip mode. The dips have been quite tiny though which speaks about the bullishness in this market. After yesterday’s strong rally DJ is near the high of the short-term bull channel. If the market pulls back the 23.6 retracement level (33590) is important as it coincides with the bull channel low. The market is bullish above 33590. Alternatively, a decisive downside breakout from the channel would be likely to move DJ to 33280 or so.

Dow Jones Industrial average has been a strong performer over the last few weeks. Now the equity index has extended its move higher as the slowdown in US inflation bolstered the belief that the Fed would back off from its most aggressive hiking plans. After the inflation report last week the probability for a 100 bp hike is only 34.5%. Traders are currently pricing in a 65.5% probability for a 50 bp hike. Inflation in the US is still close to record high levels but the CPI report showed some easing had taken place with the annual CPI at 8.5% in July vs. 9.1% in June. Data on Thursday showed that U.S. suppliers raised prices in July at the slowest annual pace since last fall, buoyed by a drop in energy prices.

Another bullish factor for the stock markets is the positive consumer sentiment. The University of Michigan’s preliminary consumer-sentiment index for August exceeded the July number by a wide margin coming in at 55.1 in August, up from 51.5 in July. A final reading will be released later this month.

It’s encouraging that even though China reported on Monday that its economy slowed down in July sending commodity prices lower investors were still bidding the stocks higher. Lower commodity prices and most importantly the lower price of oil supports not only the idea of inflation peaking but also helps the consumer-driven US economy to grow. 

USOIL chart 08 16

USOIL stays weak as the red team keeps on selling the rallies. The market is trending lower and is now once again testing near the 86.37 – 87.28 support area. In order to turn the market bullish in the daily chart, the green team would need to push the market decidedly above the 94.30 resistance level. Looking at the intraday charts we have the nearest key resistance point at 89.06. Above the level, I could see the bulls trying to push the market to 90.60 or so. If the bulls don’t have the strength to push the market above the 89.06 level we probably get a re-test of 86.32 support today. 

All in all, news flow at the moment is quite negative for oil. Worries about lower demand for oil just got another boost from the world’s second-largest economy. China’s economy took a hit in July as the boost created by the easing of Covid-19 restrictions and lockdowns started to wane. Economic activity slowed down on a broad front. Factory output, investment, consumer spending, youth hiring and real estate all contracted in July. In a surprise move, China cut interest rates to counteract the slowdown.

Macro Drivers for the USD 

As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveFed hiked the target range again by 75bps (to 2.25%-2.5%). This was the fourth consecutive rate hike. The rate hike was in line with analyst forecasts. The Fed noted that ongoing increases in the target range will be appropriate but the next decisions will be data-dependent.
YieldsThe 10-week range in the US 10-year treasury yield has been from 2.516% to 3.498%. 
EmploymentThe US economy added 258 thousand new jobs. June number was revised from 390K to +384K and the average hourly earnings increased 0.5% (month over month) vs 0.3% predicted by the analysts. Such strong growth in employment and earnings reminds us how strong the US economy still is. 
InflationThe US inflation rate for June (YoY) dropped more than expected. The July reading came in at 8.5% after a 40-year high of 9.1% prior. Analyst forecasts had put the number at 8.7%. The cost of energy rose 32.9% (vs. 41.6% in June). Lower cost of petrol (44% vs 59.9%), fuel oil (75.6% vs 98.5%) and natural gas (30.5% vs 38.4%) contributed to the decline. The cost of electricity however increased by 15.2%. Food inflation however increased by 10.9% vs 10.4% prior. 

 The Next Main Risk Events

CAD – CPI m/m
CAD – Common CPI y/y
CAD – Median CPI y/y
CAD – Trimmed CPI y/y
AUD – Wage Price Index q/q
NZD – Official Cash Rate
NZD – RBNZ Monetary Policy Statement
NZD – RBNZ Rate Statement
NZD – RBNZ Press Conference
GBP – CPI y/y

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta

Chief Market Analyst

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