- Gold broke to record highs above $2500 on Friday
- Price tested former channel resistance and bounced earlier today, hinting the level may now act as support
- USD on backfoot as EUR/USD, USD/JPY consolidate recent breakouts
Having broken to record highs on Friday and with a week to speculate on what Fed chair Jerome Powell may signal on the US rate outlook at the Jackson Hole economic symposium, the bullish breakout in gold could easily extend in the coming days.
Resistance turning to support?
The price action on Monday has done nothing to undermine that view, with gold testing former channel resistance before bouncing off the level. Granted, it’s a sample size of one, but that suggests it may now act as trend support, providing a base to build bullish setups around.
Dollar remains in the doldrums
Assisting the rebound from the earlier lows, the US dollar remains on the backfoot, undermined by speculation the Fed may deliver a major dovish policy shift at the Jackson Hole symposium later in the week.
While I’m sceptical the Fed will provide a dovish surprise, increasing the risk of a possible late week dollar reversal, you get the sense markets will run with the narrative until proven otherwise, generating tailwinds for commodities priced in dollars.
The bullish breakout in EUR/USD, following the bearish breakout in USD/JPY earlier this month, shows the kind of mood traders are in when it comes to the US dollar right now. With no major economic data to shift sentiment this week, there is room for the move to extend ahead of Jerome Powell’s speech on Friday.
Long gold trade setup
Those considering gold longs could buy around these levels with a stop below Monday’s low for protection. The first target would be the record high of $2510, although, to make the trade stack up from a risk-reward perspective, $2550-60 comes across as more appropriate target zone. The latter figure coincides with the location of a trendline established last year, making it as good a level as any when we’re facing unchartered territory.
-- Written by David Scutt
Follow David on Twitter @scutty
