Gold Traders Should Watch The U.S. Dollar Index Closely

Key Insights

• Gold pulled back as U.S. dollar rebounded to multi-month highs. 
• U.S. Dollar Index will likely face strong resistance in the 103.40 – 103.65 level. 
• In case the U.S. Dollar Index fails to settle above 103.65, gold markets will likely get more support. 

Gold markets have been under pressure in recent weeks. Gold’s attempt to settle above the $2000 level was not successful as traders focused on the strong rebound of the U.S. dollar.

Higher Treasury yields have also put pressure on gold markets. The yield of 2-year Treasuries moved back towards the 4.95% level, which the yield of 10-year Treasuries tested new highs near the 4.20% level.

Meanwhile, the pullback in major indices did not boost support for traditional safe-haven assets like gold. At current levels, gold is down by 7.5% from yearly highs. Is this pullback sufficient to lure new buyers?

In the near-term, gold traders should watch the dynamics of the American currency. U.S. Dollar Index has faced resistance in the 103.40 – 103.65 range, which is located near the peak that was reached back in early July.

In case U.S. Dollar Index manages to settle above the 103.65 level and moves above 104.00, gold and other precious metals may find themselves under significant pressure.

However, it remains to be seen whether the American currency can continue its rebound. The FedWatch Tool indicates that there is a 60.5% probability that Fed will leave the interest rate unchanged by the end of the year. Traders expect that Fed will start cutting rates in May 2024.

Markets are forward-looking, so asset managers will start to prepare for future rates cuts well ahead of the next May, which will be bearish for the U.S. dollar. From a big picture point of view, the U.S. dollar is moving lower in a strong trend that was started in October 2022, and it will need significant catalysts to change this trend.

In case such catalysts do not emerge, traders will focus on the fact that gold has moved to more attractive levels, so gold prices may get support near the $1900 level.

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