By Bhavik Patel
Gold has lost its momentum on the upside after hawkish comments from the US Fed, strong US Q1 GDP and housing data. Powell had stated that they will raise the rates at least two more times this year and now markets are anticipating rate cuts after March next year only. The resiliency in the U.S. economy is forcing markets to re-price the monetary policy outlook for the rest of the year. Despite continuous rate hike, the US economy is evidently strong and recession is being delayed which helps Fed in raising the rates. This strengthens the US dollar and US Treasury yield which weakens the prospect of Gold.
The Federal Funds Rate is currently in a range between 5 and 5.25 percent. The Fed had previously slashed rates to zero in 2020 to help the U.S. government facilitate COVID-related relief. Covid situation worsened the supply chain which is when we started seeing a rise in inflation. Pent up demand increased and supply chain failed to increase with demand which helped inflation stay at elevated levels, but Russia’s invasion on Ukraine worsened it. Now the Fed is on a warpath to bring the inflation down below 2% at the cost of the economy. Inflation has come down from record level but still is sticky enough to remain high and above the comfort of the Fed, which is why the Fed is unwilling to pause the rates and continues to remain hawkish.
Gold is seeing its worst month since February as markets shift expectations, pricing in a nearly 100% chance of a rate hike in July. Given the current macro environment, the chances of an outright recession remain slim. This might prove negative for gold as at the start of this year, gold got a boost when interest rate expectation transitioned from hawkish to dovish stance, now market is readjusting to no rate cuts and a continued hawkish stance. In the near term, gold rate is expected to remain under pressure and test between $1900-$1880 levels.
Gold: Technical Levels
Gold price is in a bearish trend as it has breached its 50% retracement taken from previous low of 54,771 and high of 61,845. The 50% retracement came around 58330 and in MCX, gold is trading below it. On the daily chart, gold has also made a ‘Head and Shoulder’ pattern and the price has broken the trendline so the next downside target according to the pattern comes around 57,230. The silver lining for gold is that the target is nearly achieved as it made low around 57,651 and the momentum oscillator also is showing that prices are in the oversold region since RSI-14 is around 30 level.
We have seen pullback in prices whenever prices come near oversold regions, so taking further short from current level is not advisable looking at risk/reward ratio. Instead we believe one can go long next week near 57,500-57,300 with an expected target of 58,500 and stoploss of 56,900. We might get sporadic bounce which needs to be played and traded but one should refrain from taking any positional long as the environment is still not conducive for sustained upside rally.
(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)