What’s Happening? Following a big breakout rally early in the year, gold paused in recent months and the formation of a head and shoulders top pattern (circled) suggested the rally was ending. Recently, there has been a surge of new interest in gold, causing the bearish pattern to fail and a new upleg commence. Big US economic reports this week, particularly ADP and nonfarm payrolls, could keep USD and gold in the spotlight.
After trending lower through 2014 and 2015, gold bottomed out late last year and at the start of 2016, gold staged a big breakout rally driving up from near $1,045 toward $1,285.
Gold then levelled off and was showing signs of peaking with the RSI falling back toward 50 and a head and shoulders top forming in the price. More recently, signs of renewed accumulation started to emerge including the RSI indicator holding 50 and a new trend of higher lows.
Gold has now started to break out again, first clearing shoulder resistance near $1,265 then channel resistance near $1,285. Currently challenging Fibonacci and round number resistance near $1,300, next upside tests appear near $1,345 a late 2014 high then a measured $1,365.
As the world’s premiere hard currency, gold often trends in the opposite direction of USD the world’s premiere paper currency. The unrelenting drive higher by USD through 2015 drove gold down, while USD relenting and starting to drop back in 2016 has been helping gold recover.
Last week, more fundamental factors emerged that suggest the USD could continue to weaken in the coming months. Gold had rallied on speculation of a hawkish Fed and extremely dovish other central banks. Last week’s surprise decision by the Bank of Japan to not add to its stimulus program and the Reserve Bank of New Zealand to not cut interest rates adds more evidence suggesting the recent wave of monetary easing is ending and central banks are shifting back toward neutral.
With US business struggling through the winter, the last Fed statement suggested FOMC hawks were counting on a resurgence of consumer spending to drive economic growth toward a June rate hike. On Friday, weak personal spending (despite strong personal income) and weak consumer confidence eroded the case for a hawkish Fed further.
This week’s ADP and nonfarm payrolls, plus manufacturing and service PMI reports may give traders a better idea of momentum in the US economy and could drive FOMC speculation through the week which could impact trading in USD pairs and gold.