Gold Tests Support on Dollar Turnaround

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Updated: Sep 29, 2020, 15:21 UTC

Gold and with that also silver have reversed lower following the dollars abrupt turnaround on Tuesday. While the long term outlook remains supportive, the short-term technical outlook has deteriorated with three lower highs pointing to a loss of momentum. We take a closer look at the levels to look out for in gold and given the current importance of the dollar also the levels in EURUSD.

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In our latest precious metals update from Tuesday titled “Precious metals pop higher as dollar extends slump” we highlighted the reasons for maintaining a positive outlook for precious metals. It was the day when the EURUSD challenged €1.2000 while US real yields where hitting fresh record lows.

In it we wrote: “Gold is once again taking aim at the psychological $2000/oz level above which the price has only closed five times back in early August. The trifecta of dollar weakness, falling real yields and the general level of risk appetite should potentially already have seen it back above that level. Perhaps a sign that the period of consolidation may extend a bit further before the price eventually mount a challenge at $2000/oz and the next level of resistance at $2015/oz.”

Fast forward a couple of days and the dollar has reversed sharply higher with a record EURUSD long through futures starting to get squeezed. This after European Central Bank’s Lane confirmed that the bank was uncomfortable with a strengthening euro, thereby potentially signaling a line in the sand at €1.20. The dollar strength that followed has stopped the commodity sector in its bullish track with corrections emerging in crude oil, copper and some agriculture commodities.

With gold having failed to benefit from the mentioned tailwinds earlier in the week the short-term outlook could potentially turn a bit more challenging. Apart from tomorrow’s US job report, the focus will stay with the dollar and its short-term direction.

On the euro, John Hardy wrote this in today’s Market Quick Take: “The big levels to the downside are the 1.1700 area range low (and notable Fibonacci retracement) and the absolutely critical 1.1500 area, which was a major cycle resistance on the way up and effectively the secular trend support. The price action could prove jumpy until the other side of the ECB meeting next Thursday, where the pressure is on for the ECB to act after a record low CPI print for August.”

As per the chart below the three lower highs is a concern and it may signal the need for a deeper correction as short term longs exit the market looking for better entry levels. The levels to look out for in terms of support are:

$1927/oz – Today’s low and trendline support from the June low,
$1900/oz – The 50-day moving average and recent lows,
$1837/oz – The 38.2% retracement of the March low to August high