Key Talking Points:
- XAU/USD drops below significant support, consolidates before further selling pressure
- Momentum indicators show continued selling pressure dominance
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Another week has gone by and gold is in a worse position than when I left it last Thursday, playing into the fact that demand for its safe-haven appeal as a non-yielding asset continues to weaken. The fall below the 50% Fibonacci at 1,765 was a significant move for gold bears, and the technical catalyst I was focusing on for further downside pressure.
This level has proven its importance again as it has now become a short-term resistance area as sellers aim at their next target, somewhere between the 1,700 mark and the 61.8% Fibonacci at 1,689. If we look at momentum indicators, not much has really changed since last week. The Stochastic continues to oscillate between 80 and 20 in a pretty consistent matter, whilst the MACD is once again widening the negative convergence between its two lines, signaling that further downside is expected as attempted recoveries fall short from materializing even when buying pressure increases.
Looking at the daily chart, spot gold looks poised to continue its steady decline of the last two months, pushed down further in part due to the effect that rising bond yields have on gold, all whilst equities continue to trade at multi-year highs despite valuations showing persistently overbought conditions.
XAU/USD Daily chart
Aside from the levels mentioned above, further bearish moves could find support at the descending trendline formed back in August, aiming at the 1,640$ area for a possible inflection point.
The recent weakness in XAU/USD also stems from the recovery in the US Dollar, with the US Dollar index bouncing off two-month lows on Thursday in an attempt to break above 91.50, where short-term resistance was encountered back at the beginning of February, although further upside was rejected yesterday at 91.38.
Fundamentally, the US Dollar is testing the waters as it awaits inflation and bond yields to start picking up again, allowing the US currency to offer greater returns. The recent calmness in the bond market is keeping demand for USD low as risk-on has taken over again, allowing XAU/USD to take a breather before its next leg lower.
US Dollar Basket (DXY) Daily Chart
— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin