With crude oil up for the third day, on fresh escalation of tensions in the Middle, and combined with stronger-than-expected US labour market data, gold and bond prices are falling again and the dollar is rising. This is undermining the near-term gold forecast. If more evidence of economic resilience emerges this week, or we see increased tensions and oil prices go even higher, gold could drop towards the $4,000 area.
Rising oil and US data strength undermine gold forecast
The losing run for gold continues, as investors price out expectations of a more accommodative Fed against the backdrop of this year’s inflation resurgence amid the oil price spike and recent strength in US data. Today, ADP was a touch higher than expected at 122K, while yesterday saw JOLTS much better than anticipated. If incoming US data continues to surprise positively, investors may increasingly express a more hawkish Fed view through renewed dollar strength, particularly against lower- and zero-yielding currencies and commodities like the Japanese yen and gold.
Technical analysis: bearish momentum builds for XAU/USD
When bullish signals fail to work, that is typically a red flag. Case in point: The precious metal formed a hammer candlestick off the 200-day moving average support on Thursday last week, which was a bullish signal. However, the upside follow-through has been fairly limited.
On Friday, we did see some additional buying interest, and for a time it looked as though gold was breaking above a resistance trendline and the key resistance area around $4,580, where it had previously encountered selling pressure. However, the move was rejected, and since then prices have eased lower once again.
This suggests that the bullish traders who bought following the hammer candle may now be trapped. If bearish momentum builds further here, that could put the bulls under serious pressure. There are likely stop-loss orders resting below the low of that hammer candle, near $4,366, and those positions could come under threat, potentially leading to a sharp drop.
That’s the area I would be watching if selling pressure accelerates. Beyond that, there are few obvious support levels until the March low, just below the $4,100 area. That leaves considerable room for gold to decline, potentially even towards the $4,000 level.
For now, however, the bulls are clinging to support around the $4,400 area, where we have previously seen significant price action and where the 200-day moving average is converging. Therefore, gold is not looking overly bearish just yet, but that could change if selling pressure intensifies.
On the other hand, if the precious metal manages to break decisively above the former resistance area around $4,580, then the next upside target would likely be around $4,660, where we previously saw notable price action.
However, breaching those levels would likely require a sharp decline in oil prices and a confirmed agreement between the United States and Iran that eases tensions and reopens key energy supply routes.
Key takeaway point for gold forecast
In short, gold to look sluggish amid ongoing uncertainty over oil prices and the outlook for interest rates. As it stands, it looks like only a sharp drop in oil could prevent the metal from sliding to $4,000.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
