Gold outlook: Metal falls further as US dollar extends gains

• Gold outlook undermined by US dollar and rising yields
• Will gold find haven demand?
• Gold technical analysis paint a bearish picture for now

Gold has fallen sharply again today, breaking below $1900 support level. The breakdown has given rise to fresh technical selling below this level, further exacerbating the sell-off. The metal has been coming under pressure from two main sources: Strong US dollar and rising global bond yields, both find strong support on any short-term dips. After rising for 10 consecutive weeks, the dollar index is on course to add one more weekly gain on top of that this week. There’s no fresh news behind its latest gains. Yet there has also been no macro reason for the dollar rally to end, apart from the fact it is getting a bit overstretched in the short-term outlook. Gold is so far not benefitting from a risk off environment either. But for how long will that be the case?

Gold outlook undermined by US dollar and rising yields

The US dollar has been on a strong rally. It has been boosted by relatively stronger data in the US compared to other developed economic regions, such as the UK and Eurozone. Persistent signs of inflation, coupled with recent gains in crude oil prices, influenced by the OPEC extending its output cuts, have provided further impetus for Federal Reserve policymakers to maintain a more hawkish stance on interest rates. Consequently, the anticipation of the first interest rate cut has been pushed well into the latter half of 2024, with the Federal Open Market Committee (FOMC) now forecasting only two rate reductions, down from the previously projected four for the upcoming year. This shift in sentiment has led to the 10-year Treasury yield surpassing 4.50% for the first time since 2007.

The distinctly more hawkish stance of the US central bank, in contrast to its counterparts abroad, has been a driving force behind the robust performance of US bond yields and the US dollar. This resolute bullish trend in the dollar raises doubts about a swift recovery in gold prices.

Will gold find haven demand?

Gold bulls will be in search of catalysts for immediate change to arrest the dollar and bond yield rally. One conceivable trigger could be another credit rating downgrade, given the escalating levels of US debt and the growing concern over servicing costs. Additionally, a potential dollar sell-off might be sparked by a government shutdown, although this would not directly impact the Treasury Department's capacity to meet its bond obligations. However, such an event could disrupt the timely release of critical data, including monthly job reports and Consumer Price Index (CPI) figures.

Gold has so far not benefitted from a risk off environment either, with stocks breaking lower. But for how long will that be the case? Surely if the stock and bond market rout continue, investors may park their funds in haven assets like gold, especially as prices have been on a bit of sale lately. For short-term speculators to turn bullish on gold, we will need to see a key reversal pattern first. That hasn’t happened yet.

Gold outlook: Key technical levels to watch

Source: TradingView.com

With gold breaking below key support at $1900, in line with our previous expectations, the path of least resistance in the short-term outlook remains to the downside on the metal. From here, the bears may target liquidity resting below the last low made in August at $1885 next. Thereafter, the area around $1858 would be in sight. This is where the metal last staged a breakout from back in March.

On the upside, broken support around $1900 is now the most important short-term resistance for the bears to defend. Failure to do so could trigger a sharp short squeeze rally, initially towards the next resistance at $1913/15 area.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R