Gold Price Forecast: Bulls need to clear this falling channel hurdle, dollar looks weak

Gold defended a key trendline support this week. The bearish-to-bullish trend change, however, is still not confirmed.

The safe-haven metal fell below $1,200 in the first half of the week, as expected. The drop below the psychological support was short-lived, possibly due to the pullback in the dollar index from 97.69 to levels below 97.00.

Notably, the yellow metal defended the support of the trendline connecting August lows and October lows with a quick recovery from $1,196.

While the defense of the trendline is encouraging, the bulls know that the job is only half done as prices are still trapped in a falling channel on the daily chart.  

At press time, gold is trading at $1,222 – up 1.32 percent on the week.

Daily chart

As of writing, the channel resistance is seen around $1,230. Acceptance above that level would only bolster the already bullish setup indicated by the bullish breakout on the 14-day relative strength index (RSI), bottoming out of the 50- and 100-day simple moving averages (SMAs) and the impending bullish crossover between the two and the ascending 5- and 10-week SMAs. 

The falling channel breakout, if confirmed, would allow a stronger rally to the 200-day SMA, currently at $1,264. More importantly, the breakout is likely to happen next week as the US dollar – gold's biggest nemesis – could in for a bigger drop next week.

Earlier this week, Fed's Powell cited housing market, fiscal deficit and slowdown in the global economy as headwinds to the US economy.

As a result, markets may begin pricing in a Fed rate pause in 2019, leading to a sharp drop in the treasury yields and the US dollar. Interestingly, the technical charts also are also painting a dollar bearish picture.  

DXY daily chart

The dollar index, which tracks the value of the greenback, is currently trading at 96.45 and could drop well below 96.00 in the next few days as the daily chart is showing a classic bearish divergence of the relative strength index (RSI).

What's more, the 10-year treasury yield has carved out a double top pattern – meaning the US rates could fall sharply if the neckline is breached.

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• Gold is likely to witness a falling channel breakout next week and rise toward the 200-day SMA of $1,364 in a week or two.
• The bullish setup would be invalidated if prices find acceptance below the rising trendline, seen in the daily chart.
• A move in the DXY above the recent high of 97.69 could trigger a fresh sell-off in the yellow metal, possibly toward the yearly low of $1,160. That said, the probability of a strong rally in the DXY is quite low.