Gold (XAU/USD) could pick up bid next week amid rising odds of a global trade war and will likely see a big rally in the emerging market (EM) currency terms. As of writing, the yellow metal is trading at $1,322 - up 1.41 percent on the day. Still, the metal is reporting marginal losses on a weekly basis.
Daily chart - bull doji reversal
The above charts show-
- The metal breached the key rising trendline support on Tuesday as Powell's strong views on the economy were perceived as hawkish.
- Prices fell further to a low of $1,302.82 (Mar. 1 low) on Thursday as markets priced-in the possibility of three more Fed rate hikes this year.
- However, the drop to $1,302.82 was short-lived as Trump went on the offensive on the trade front, boosting demand for the safe haven yellow metal. Prices closed yesterday at $1,317.09 and extended gains to a high of $1,325 today.
- So, what we have is a bull doji reversal. Also, Thursday's doji candle marked a rebound from the critical 100-day moving average (MA) support.
- Thus, gold may revisit $1,340-$1345, but the sustainability of gains is under question, given the 5-day MA and the 10-day MA are trending lower in favor of the bears.
Implied vol premium for gold bearish bets (put options) drops
- The implied volatility premium for the XAU puts (bearish bets) has dropped, according to XAU/USD one-month 25 delta risk reversals. Currently, the risk reversals are being at 0.125 XAU puts vs. 0.50 XAU puts yesterday.
- The decline in the implied vol premium for XAU puts suggests investors do not expect the yellow metal to visit recent lows around $1,300.
Macro factors favor upside in gold
- Equity markets have already given a thumbs down to Trump's plan to slap tariffs of 25 percent on steel and 10 percent on aluminum imports. Some form of retaliatory action is likely next week and that could only hurt risk assets and boost demand for the safe haven yellow metal.
- Trump's tariff plan is already being labeled as an indirect tax on consumers, meaning it will likely boost "bad inflation" and in turn force investors to divert money into gold (classic inflation hedge).
- While it is true that rising price pressures could force the Fed to hike rates at a faster rate, still it may not hurt gold. In fact, Fed's response would add to existing negative outlook on equities (positive for gold). Also, emerging markets (EMs) are sitting on a pile of dollar-denominated debt. And hence a sharp rise in the dollar funding cost could lead to a full-scale debt crisis in EMs with current account deficits. In such a scenario, the EM currencies would fall sharply, leading to higher gold prices in EM currency terms.
- Gold could re-test the rising trendline resistance (former support) next week and may break higher, confirming a bearish-to-bullish trend change if China and other major trading partners of the US retaliate against Trump's tariffs. The trendline resistance is seen sloping higher to $1,342-$1,345 by next Friday.
- On the downside, a daily close below $1,307.05 (Feb. 8 low) would confirm a double top bearish reversal and would open doors for $1,253 (target as per the measured height method). However, the downside target sounds far-fetched.
Focus on Friday's US wage growth number - Next Friday's US wage growth could make or break the yellow metal. An above-forecast number against the backdrop of fiscal stimulus, tax cuts, and trade wars would cement expectations of three more rate hikes or even four more rate hikes this year and may weigh heavily on gold.
Scenario I - Gold is trading at $1,340-$1,345
- Wage number prints well below estimates - gold will likely move above $1,366 in a convincing manner.
- Wage number beats estimates - the metal could fall back to sub-$1,320 levels.
Scenario II - Gold is trading around $1,310
- Wage number beats estimates - gold will likely drop below the 200-day MA (currently seen at $1,293).
- Wage number prints well below estimates - gold may regain bid tone and target the rising trendline resistance of $1,345.
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