Different pace of monetary normalization in the USA and other countries made XAUUSD bulls hunker down
Gold has been closed in the red zone for the fourth month in a row; last time, it occurred in 2013. Gold is under pressure due to the US dollar rise, backed up with the U.S. strong economy and the Fed’s monetary normalization. While the Bank of Japan is unwilling to quit its QE, the ECB is going to retain the interest rate at the current level through at least September, 2019, and the Bank of England doesn’t send any signals of a soon monetary restriction; the Federal Reserve has already increased the federal funds rate seven times since 2015. The derivative market suggests 71% probability that it will do it two more times this year, which creates additional obstacles to XAUUSD bulls.
Due to the gold price, being not responsive to trade wars, capital outflow from the ETF, passive consumers in India and China, the PBOC reluctance to increase its gold and foreign exchange reserves, followed by a steady increase in U.S. dollar value, speculators cut their gold net longs down to 27158 futures and options. It is about the all-time low. Even before the Fed had started its monetary normalization, the index was higher. Too bearish positioning, in historical terms, doesn’t guarantee the gold price rebound amid the profit-taking, but this scenario is growing more and more likely. XAUUSD bulls need a driver, and they expect to find it in the weak U.S. dollar.
Dynamics of gold net speculative positions
Dynamics of PBOC gold and foreign reserves
The market is not entirely confident that the U.S. economy can retain it high growth pace and continue increasing by 4% and more during the rest of this year. At the same time, the factor of EU-U.S. trade war truce can increase the Euro-area GDP growth rate. The Fed won’t be that fast with monetary normalization partly because of Donald Trump’s pressure, and partly because of the suspended inflation. At the same time, the ECB has good chances to start increasing the rate earlier than it planned in June.
I don’t expect a rapid recovery of EURUSD in August -September. The opponents still lack drivers to shift the balance in their favour; gold price will also be traded in the trading range. Especially since Beijing is willing to stabilize yuan to avoid the capital outflow from the country. Taking into account the close correlation between XAUUSD and USDCNY, I can suggest that gold price will be consolidating in the range of $1200-$1250 per ounce during 3-4 weeks.
Dynamics of yuan and gold
In the short-term, XAUUSD quotes will depend on the Fed’s rhetoric at its meeting in July and the report on the U.S. labour market. The central bank’s focus on slow and gradual monetary normalization and slow increase in the U.S. average wages will support gold prices. Otherwise, the Fed’s confidence in four hikes of federal funds rate in 2018 and increase in the U.S. average earnings up to +0.4% M-o-M will encourage bears to test the psychologically important level of $1200 per ounce.
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Price chart of XAUUSD in real time mode
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