Gold Price Analysis: XAU/USD fails around 1,800 despite the broad dollar's weakness

Update: Gold prices have been pressured since the beginning of the week after testing the highs of $1,830.32. A fresh round of selling emerged when prices slipped below $1,800 on Tuesday.

Broad-based USD strength exerted pressure on the precious metal.

The US Dollar Index (DXY), stays strong near 93.00 with 0.22% gains and attracts inflows to its safe-haven appeal.  A higher USD valuation makes gold expansive for the other currencies holders.

Gold Holdings in SPDR Gold Trust, the world’s largest gold-backed-ETF were little changed for the third day at 998.52 tonnes.

US President Joe Biden will present a six-pronged strategy to fight the spread of the Delta coronavirus variant.  

Hawkish comments from two Fed’s officials also boosted the sentiment around the USD, which kept the pressure on the gold prices.

Meanwhile, the European Central Bank (ECB) decision will be in focus to gauge the market sentiment.

End of update

At the time of writing, the price of gold is holding up in what has been a bearish weekly correction to the day's lows of $1,782.47 so far. 

XAU/USD has fallen from a high of $1,802.18 and is currently 0.13% lower at $1,792.11. 

Markets have soured on the eve of the next major central bank meeting this week. 

Due to the highest readings of inflation for almost a decade, the European Central Bank is expected to start to taper its asset purchases and markets are bracing for such an announcement tomorrow. 

This sentiment was first thrown up by Philip Lane, at last month's Jackson Hole.

Lane is a Member of the Executive Board of the ECB and he was advocating for the calibration of the QE program to financial conditions BOTH in an upwards and in a downwards direction.

Lane was using the new all-time lows seen in EUR real rates as an argument to tone down PEPP-purchases, potentially as soon as this month. 

Markets jumped on this and have been toeing a line of caution ever since, regarding the message as the start of the process of tapering. 

“The first P in PEPP stands for pandemic, not permanent, and for a good reason,”

Bundesbank President Jens Weidmann also said last week, as hawks circle over the ECB. 

US dollar catches a safe-haven bid

The combination of central banks removing stimulus, albeit slowly and with caution, the spread of the coronavirus and the prospect of a slowing economy has weighed on risk sentiment this week.

In turn, this has seen flows into the US dollar and away from risk assets.

Additionally, US yields had helped the greenback along in its plight for a restest of the daily counter-trendline in the DXY index this week, (see DXY chart below). 

The benchmark 10-year Treasury note rose as high as 1.385% on Tuesday, its highest since mid-July and a climb of almost 6 basis points from Friday's close. 

The ten-year yield has been building a bullish case since the August 2 double bottom:

Rising yields would be expected to elevate real yield higher also, which has been a headwind for gold prices this year. 

 The US dollar, as measured against a basket of major peers in the DXY index, is trading 0.11% higher on the day at 92.625. However, it had reached as high as 92.862 in the New Yorks mid-morning session.

Meanwhile, following last week's dismal Nonfarm Payrolls, which meant that expectations of an imminent taper were dialled back, Fedspeak has been on the radar this week. 

While both the US consumer Confidence and jobs data were terrible in August, it came at the same time as a new high in the spread of the Delta variant. 

This leaves the bar low for an improvement in the data should the nation get the spread under control with its vaccination programme. 

This makes tomorrow's address to the nation by the US president, Joe Biden, a critical event for markets. 

In the same view, the markets could be underestimating the prospects of a hawkish September meeting, despite the NFP data. 

While the Fed will likely forgo announcing a taper of stimulus at this month's policy meeting, wage growth remains solid. This means that there is the potential for inflationary pressures to steer the hand of the Fed should the virus be contained with higher vaccination rates in the coming weeks. 

Meanwhile, St. Louis Fed president James Bullard recently told the Financial Times that the central bank should go forward with a plan to start trimming stimulus this year despite the data. 

We have more recently heard from New York Federal Reserve President John Williams singing the same tune as his hawkish colleague, Bullard:

Fed's Williams: Appropriate to start reducing pace of asset purchases this year

Fed's Williams: Asset valuations are very high

The TD Securities US macro strategy team ''highlights that this is likely the last word from any of the four most senior Fed officials before the start of the blackout period for the meeting in two weeks time.''

Therefore, such hawkish rhetoric would be expected to support the greenback in the near term.

With that being said the analysts at TDS said, ''gold should benefit from rising central bank interest while presenting optionality for an inflation overshoot as risks remain elevated due to lingering supply-side shocks.''

Our ChartVision framework argues that gold prices need only breach $1,870/oz by year-end for an uptrend to form,'' the analysts forecasted.

DXY & Gold technical analysis

The DXY is on the verge of a retest of the counter trendline as follows:

The bulls moved in on the 50% mean reversion following a break back above the 50-day EMA, the 20 and now the 10.  This now exposes the counter trendline resistance near the 93 areas and a 61.8% golden ratio. 

For gold, such a move would be expected to tip it to the edge of the abyss.

In Tuesday's analysis, it was illustrated that there were prospects of at least 38.2% Fibonacci retracement prior to the next downside continuation in the markdown phase of the Wyhcoff methodology as follows:

Prior analysis, the hourly chart

The price moved according to the forecast as follows:

From a daily perspective, should the US dollar continue to recover, the price could extend to as low as 1,750 in the near future:

However, the weekly picture tells a different story:

So long a the price maintains support near the 38.2% Fibo, the longer-term weekly dynamic support should see the price move higher longer-term.