We saw a bit of recovery in the stock market since the US open, with the dollar easing lower on suspected BoJ intervention in the USD/JPY helping to calm the nerves. That in turn helped to provide some support for gold, too. Still, not much has changed fundamentally to signal a return to the risk-on, dollar-off trade. Risk assets remain under pressure despite the small recovery. Oil prices eased from their overnight highs after the latest exchange of strikes between the US and Iran, but WTI was climbing back above the $90 a barrel at the time of writing. Bond yields are also holding onto their gains, leaving investors with little incentive to add risk. So, we may see the markets unwind their moves heading deeper into today’s session or later in the week. For that reason, we maintain a cautious gold outlook in the sort-term.
Carry trade unwind and oil surge is the key risk facing markets
The problem is that several pressures are now reinforcing each other. Oil is surging on the escalating US-Iran conflict, raising concerns about inflation and keeping expectations for a more hawkish Fed elevated. At the same time, global bond yields continue to rise, making equities and other risk assets less attractive.
There is also growing concern about an unwind of the yen-funded carry trade.
Japan’s 10-year government bond yield has broken above 3% for the first time since 1996. The move is significant because Japan has been the world’s cheap source of funding for decades. Investors have been able to borrow yen at very low rates and deploy the money into higher-returning assets elsewhere.
That trade becomes increasingly expensive as Japanese yields rise and the Bank of Japan moves towards tighter policy.
US Treasury Secretary Scott Bessent recently suggested that Japanese authorities could take steps that would lead to a stronger yen, while markets are already pricing further Bank of Japan tightening.
If investors have borrowed yen to buy US equities, emerging-market assets, gold, Bitcoin or other riskier investments, higher Japanese borrowing costs can force them to reduce those positions — creating selling pressure across global markets.
Technical gold outlook and key levels to watch
With the metal making a lower, following the recent selling and a stronger US dollar, the key question is: where do we go from here?
Well, the gold price bounced back after forming a lower low below the $4,325 level, which was the base of the previous rally. But now the metal is at resistance in the $4400-$4436 region, so it could resume lower one more.
If it does, then the next downside target could be the 61.8% Fibonacci retracement level (not drawn on my chart) against the most recently rally, which comes in around $4,230. Below that, the 78.6% Fibonacci retracement comes in around $4,105, which is also close to the point of origin of the recent bullish breakout. So, that could be a very important support area to watch if gold continues to push lower from here.
But if that level gives way, and we break below the low of $4,065 formed on the breakout day on 5th August, that will completely invalidate this recent bullish move.
On the upside, meanwhile, the abovementioned $4400-$4436 region is where gold had previously found support and resistance. It is imperative that the bears hold their ground here if the want to target those levels mentioned. If gold breaks above that zone, it would be a positive technical move for the short-term gold outlook. In that case, a pop back to the $4515/20 region, where the 200-day converges, would become likely.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
