Gold drops but will it find some love again?

Gold came under renewed pressure in the second half of Thursday’s session, before bouncing mildly off its lows at the time of writing. Can the metal make a fully recovery and resume higher, or will investors continue to punish the non-interest-bearing commodity?

The metal had been consolidating in a tight range over the past few days following the big sell-off at the end of last week. The move lower coincided with the dollar attempting to form a base, as the USD/JPY bounced sharply off its lows while the EUR/USD and GBP/USD came off their best levels. But will those move fade once again as we head deeper into the New York session? We have seen plenty of sideways volatility in FX this week, providing short-term focused traders plenty of tradable opportunities. But what is lacking is a clear direction for the dollar, which has had difficulty making its mind up. On the one hand, the dollar has been supported on the dips, in response to the Fed’s hawkish comments and mixed data, while on the other, the overall positive tone across risk assets has boosted the appeal of foreign currencies in favour of the reserve currency. Caught in this crossfire, gold has been unable to move in either direction meaningfully in recent days.

Gold traders will be paying close attention to upcoming US data releases as they attempt to move the metal out of its consolidation. Looking ahead, we have the closely-watched US sentiment surveys from the University of Michigan on Friday, followed by CPI in the week ahead. The UoM’s consumer sentiment and inflation expectations surveys have been closely monitored in recent months, as investors have tried to front-run the Fed in anticipating policy changes. The data should move the dollar, gold and stock markets sharply if we see significant deviation from expectations. US consumer inflation data will be published on Tuesday of next week. Inflation has been falling and the Fed has responded by slowing the pace of its rate hikes to 25 basis points. It looked like the Fed would hike rates one more time, in March, before pausing. But after a much stronger jobs report, the probability of two more hikes has shot higher. If CPI comes in hotter, then this could further boost those expectations.

Gold has absorbed a lot of the dollar-positive news by consolidating in recent days. Yet, it hasn’t shown any signs of a recovery yet. What the bulls will need to see if the formation of a key reversal pattern on the daily chart, ideally around the current levels. A bullish hammer candle and a close above $1880 would be a good start. Until such a reversal is witnessed, the bulls must remain patient.