Trading currencies investment forecast: USD and XAU

Gold (XAU/USD) continues to shift to new yearly highs, at above US$1,800oz there is little sign of it breaking back below the US$1,652oz support level that would have seen a bearish signal, and every chance it will test the resistance band at US$1,830oz.

What is also clear from XAU/USD trading versus other fiat currency pairs is that ‘perception’ of risk is varying wildly.

This concept is perfectly highlighted by Fed Chair Powell’s testimony to the Democratic-led Senate in which he stated:

‘While this bounce back in economic activity is welcome (reflecting a resumption in activity), it also presents new challenges’…’[It’s] extraordinarily uncertain and will depend in large part on our success in containing the virus,’

He went further stating that‘a full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.’

The final part of his testimony reiterating the Fed’s overall position:‘[We are] committed to using our full range of tools to support the economy and to help assure that the recovery from this difficult period will be as robust as possible.’

It’s a stark reminder that the US is far from through the worst of what COVID-19 could bring. And that the second wave flare-ups in the likes of Texas, Florida, Arizona, and Nevada could derail the recovery and all the gains the US had made thus far. It certainly feeds into the XAU/USD movements and a risk off view.

Yet like we discussed last week the USD is finding further support lacking, and this is despite the second wave risks.

AUD/USD rebounded this week to be back in the $0.69 handle despite the reintroduced lockdowns in the state of Victoria. EUR/USD is pushing into the upper levels of $1.12 on the better economy data from the US and elsewhere. The JPY is also losing ground as risk currencies see inflows. A clear risk-on move in fiat currencies.

In short, it’s an interesting trading environment and we understand why XAU/USD is continuing to see long positions. There is a strange equilibrium in-play at the moment between Risk-On and Risk-Off.