Gold Upside Capped by Rate Hike Expectations

5 July 2022, 02:37

Market Focus

The US equity market remained closed yesterday due to the US Independence Day holiday, but the cautious mood ahead of this week’s Monetary Policy Meeting Minutes from the Fed and the European Central Bank has exerted bearish pressure on investors’ sentiment. Futures for US equity indices and European bonds fell as investors were worried that a faster pace of monetary tightening from global central banks will slow economic growth. Economic fears  kept risk profiles weak, which in turn helped the US dollar to remain upside momentum.

Looking at economic data, the Producer Price Index from the Eurozone rose 0.6% in May and came in weaker than market’s expectations of 1%, which continue to warrant rate hikes from the European Central Bank. The dismal European data undermined demand for the euro while the energy crisis also acted as a headwind for the shared currency amid the Russian invasion of Ukraine. The Market’s focus has now shifted to the FOMC minutes of its latest meeting on Wednesday and the Nonfarm Payrolls report on Friday, as market participants expect the Fed to raise interest rates by 75 basis points.

Main Pairs Movement

A slow beginning to the week, as US markets were closed due to the Fourth of July Holiday. The DXY was in a holiday mood during the first half of Monday and stayed steadily around 105.1 before gaining some strength by the end of the day, reaching 105.198. However, action was limited as some traders stayed away from their desks.

GBP/USD was surrounded by bullish momentum at the start of Monday, even reaching a daily high around 1.2154, but then lost its bullish traction and fell down to around 1.2105 as Brexit woes undermined demand for the pound. At the same time, EUR/USD rebounded from last Friday’s low around 1.039 to a daily high around 1.045 at the midpoint on Monday. However, dismal European economic data undermined demand for the shared currency, and EUR/USD closed by 1.0425.

Gold continued the rebound momentum gained from last Friday’s daily low below $1786 and managed to reach above $1812.5 before falling below $1805 as the expectations of interest rate hikes made gold less attractive.

Technical Analysis

USDJPY (4-Hour Chart)

USDJPY has advanced toward near 135.70 at the time of writing. USDJPY turned upside after experiencing a correction. From current levels, weakness below the resistance level of 135.70 would continue to find a robust support at 134.89. If the support level is broken, then it would trigger  fresh technical selling, making USDJPY slide further south. On the flip side, if the pair can break through the resistance at 135.70 and further above the ascending trend line, then USDJPY could potentially attract more buyers to lift the pair above the psychological level of 136.00 and 137.00.

Resistance:  1.35.70, 137.00

Support: 134.89, 134.24, 133.59

GBPUSD (4-Hour Chart)

GBPUSD clung around 1.2100 on Monday. The pair reversed its direction after reaching near the support level around the 1.1934 area. The British pound looks to retake its position as the RSI indicator stays low, suggesting that buyers are remaining on the sidelines for the time being. In the meantime, the MACD has turned positive, indicating the reversal trend from bearish to bullish. To the upside, GBPUSD is heading toward the next resistance at 1.2227. If the pair can successfully breach the level, then it would continue to head toward north. On the downside, if the support level of 1.1934 cannot eventually defend the line, then GBPUSD would slide further south.

Resistance: 1.2227, 1.2408, 1.2555

Support: 1.1934

Gold (4-Hour Chart)

Gold struggled to stage a recovery on Monday following last week’s drop. Despite gold attempts to climb above the $1,800 level, it stayed under modest bearish pressure, remaining within the descending channel. At the moment, even though the RSI indicator stays below the midline, gold looks to be capped by the midline of the Bollinger Band, having a hard time moving further north. Gold needs to climb above $1,835 in order to reclaim bulls in the near-term. On the flip side, if the current support level at $1,784 cannot hold, then gold would accelerate further south.

Resistance: 1835.026, 1866.243

Support: 1784.565