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Gold Price Analysis: XAU/USD bullish bias starting to fade

  • Gold is testing critical support as the US dollar shows there is still some life to it.
  • The stimulus is now fading which is a hurdle for the bullish trend in gold.

Gold prices are testing the bull's commitments at the support structure around $1,906 in what could be a final test before the next leg higher of the bullish trend.

At the time of writing, gold, XAU/USD, is trading at the lows of the day, $1,905, having travelled from a high of $1,955.62, down some 2% to start the week.

Gold prices have been in consolidation since correcting from all-time highs in late July and subsequently printing a low of 1861 at the start of August. 

The price has chopped sideways, decelerating its daily range as markets try to get a handle on the various features of today's market conditions.

One of the main drivers for precious metals has been the notion that real rates will be lower for longer as the Fed maintains a dovish outlook for several years ahead with inflation grounded. 

However, with such sentiment already priced in, bloating positioning data could be a hurdle for the bulls at this juncture.

The stimulus is now fading

Given that the positioning data reflected expectations that Federal Open market Committee officials would strike a more dovish tone and suggest changes to the QE program, which they did not, we could be seeing some disappointments in the price action now.

Meanwhile, a surge in the US dollar has not helped the spot market at the start of this week. 

The DXY is trading at 93.66 and higher by some 0.7%. 

With fiscal stimulus still in question, even more so following the death of Justice Ruth Bader Ginsburg, the probability that a Phase 4 deal would not be dropped before the election. 

This should underpin the greenback because investors are less likely to take on risk until a fresh stimulus deal is struck. 

The single currency, the euro, should also be monitored as it feels the pressure of a second wave of the coronavirus on mainland Europe. 

The European Central Bank is in focus this week following the Financial Times publishing of a source's story that the ECB will launch a review of its PEPP programme.  

The ECB intends to examine the length of the PEPP set for June 2021 but also look at transferring its flexibility to other purchase programmes. 

It is still not clear if this will be a dovish or hawkish outcome, but given the risks of the second wave of the virus which will clash with flu season, the chances are the ECB could well be considering caring the tool into other programmes which would be dovish. 

On the other hand, PEPP would not be used in full, it will be hawkish and significantly weigh on the US dollar, likely supporting the bullish case for both the euro and gold.

Gold levels

 

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