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Gold Buckles Up For Inflation Ride

Market Brief

Gold traded back up to $1800 last night on the back of yesterday’s disappointing US ISM PMI data. The Purchasing Managers survey showed that continued disruptions to supply chains is forcing prices higher and the workforce is far from stable. Inflationary pressures were also a key part of the forward guidance from the corporations who delivered their earnings reports last week and as the yellow metal is traditionally a store of wealth and an inflation hedge, the signal is clear that gold is going to rise the more the market indicates that there is a real inflationary effect going on.

Fed Chair Powell remains resolute that the base effects and transitory nature will be just that, though it is hard to see how long businesses can keep a lid on prices when there are $6trillion new US dollars in savings and consumers willing to accept high prices.

In statements made last night, Chair Powell said the US economy has brightened but is not out of the woods yet and addressed the rising house prices, by admitting that low mortgage rates and fiscal support are adding to a tight market with high demand. The Fed would like to see all parts of the potential workforce back to work and commented on the fact that women especially had suffered due to childcare disruptions. The US treasury is increasing its borrowing due to COVID-19 spending.

The XAUUSD chart shows a clear corrective pattern to the downside from the July 2020 highs of $2080. The swing high from the start of 2021 adds a clear swing for connecting a trend line, so another $50 appreciation of gold versus the US dollar and we could have our 3rd touch of the line and then a clear signal of when the trend is about to really change.

The US dollar has made a bearish move yesterday has retraced over half of that price action in overnight trading, and a break higher than yesterday’s high would put a stop to the rise in gold as well as the likes of EURUSD, GBPUSD, and AUDUSD who have all been trading in relatively tight ranges this year so far. If the US dollar index can close above 91.50 today that opens the possibility for a further correction higher to test the 50% of the March ’21 to April ’21 bearish impulsive move at $92.00 and if that were not to hold, there is a slight gap to be filled up towards $93.00 which could act as a magnet.

This US dollar move is fuelling the USDJPY with the Japanese markets still closed for Golden Week. China is also on holiday and the USDCNH is also lifting its head off the recent swing lows of 6.46 having found the balance area from last week's resistance yesterday. The USDJPY has traded and closed above the 50% level of the previous bearish move from the March’21 highs to the April ’21 lows. Suggesting that as price accepts above 109.00 continuously, we have a base to move up towards the 110.00 level and maybe up to 111.00.

During the Asia-Pac session, the Reserve Bank of Australia kept the interest rates on hold as well as their quantitative easing program. The Aussie is feeling the pressures of today’s stronger US dollar but also due to the soft trade balance data. The RBA reiterated that they will not change policy until inflation is sustaining within a 2%-3% target and doesn’t see any material change to the economy until 2024. Australian exports were down -2% from the previous release and that could be put down to the political tensions between China and Australia.


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