Gold is off to a strong start this week as bulls have seemingly returned to the precious metal following a drastic decline last week. Alongside an immediate hit to price, the selloff sparked worries for the longer-term outlook of the commodity. That said, many of the conditions that have allowed gold to soar in 2020 remain and could continue to fuel price gains, despite recent jitters.
As an investment, gold is often viewed as a potential hedge against inflation, while simultaneously providing safety in times of volatility. Therefore, the conditions that have been brought about by covid – volatility, low interest rates and expanding central bank balance sheets – should translate into higher demand for the precious metal and consequently, higher prices. Many analysts and commentators have attributed the 2020 gold price rally to these themes and, luckily for bulls, the same tailwinds remain despite recent declines.
Technically speaking, XAU/USD may enjoy support from the areas around $1,985, $1,920 and $1,861 on the shorter time frames if selling pressure returns. In the broader view, I suspect $1,800 may hold some psychological influence that could allow selling to accelerate if pierced, but it seems possible that gold could continue higher unless such a move is attempted.
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The Euro has been struggling to find further upside momentum against some of its G10 counterparts.
EUR/USD has been in a consolidation setting with prices ranging between 1.1916 and 1.1696 for most of this month so far. Prices stalled after the emergence of a Doji candlestick, which is a sign of indecision. Downside confirmation has been somewhat lacking, but a close under the lower bound of the Euro’s consolidation could open the door to a reversal. However, rising support from May could maintain the dominant uptrend in the event of short term gains. A push above 1.1916 exposes the 126.60% Fibonacci extension at 1.2028.
As financial conditions remain loose with central banks keeping monetary policy expansive, upside in global bond yields remain capped and thus provides a supportive outlook for precious metals. Last week, we looked at the importance of falling real yields providing a bullish outlook for gold prices. With this in mind, silver prices have also been underpinned, while there is a potential for outperformance in silver, which is highlighted in the gold/silver ratio (Figure 1), given that this precious metal performs better during a recovery phase.
Silver prices have seen a breakout to reach 1-month highs, rising to $18.40. However, key resistance in the form of the descending trendline from the September 2019 peak has capped upside for now. While the outlook remains supportive for silver prices, a breach above trendline resistance is needed for confirmation, which in turn could see a return to the pre-COVID 2020 peak before the 2019 highs.
Between March and mid-May, EUR/CHF had been trading below a steep slope of depreciation before bursting out of a compression zone between it and support at 1.0500. The outburst saw the pair rise almost one percent in a single day, the largest move in a 24-hour period since September 2018. Subsequently, EUR/CHF climbed and shattered several layers of resistance along the way before topping at the January swing-high at 1.0860.
EUR/CHF retreated over two percent and stumbled at familiar levels that previously had acted as resistance. Now, the pair is trading below descending resistance and support at 1.0610. If the downward-sloping ceiling holds, EUR/CHF’s capitulation could inspire additional sellers to enter the market, and a bearish bias could exacerbate the pair’s losses.
If EUR/CHF is not ready to go lower, the pair may break resistance, but its ascent could be curbed by a near-term ceiling at 1.0665 and its big brother at 1.0679. Having said that, surmounting those obstacles could open the door to further gains If EUR/CHF’s triumph over those levels signals the beginning of another bullish spike.
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USD/JPY continues to recoup lost ground after collapsing 3% from the June high (109.85) before reacting to the psychologically imposing 106-handle.
Initial development in the RSI late last week suggested price would continue to breakdown, but the steep reversal prior to oversold readings could see USD/JPY work its way back to the 200-day moving average (108.21).
Having said that, the momentum indicator has diverged from price and its fellow technical oscillator, hinting at an underlying degree of bearishness in USD/JPY, which could see the exchange rate reverse at the February downtrend as its done on two previous occasions.
Reaction around the 200-MA (108.21) could provide a key tell for future direction, with the inability to clear the sentiment-driving moving average possibly signalling a reversal of the 5-day rally.