Gold forecast: XAU/USD extends post NFP gains

• Gold forecast remains tilted lower for now but US holiday means light trading today
• Metal boosted by weaker US dollar in the aftermath of weak US jobs report
• Trend line could limit upside from TA point of view

 

Gold forecast remains tilted lower

 

Following Thursday’s weak US jobs report gold bounced back sharply and it has since extended those gains. While the metal may have started the month and quarter on a positive note, it is worth remembering that it has just endured one of its toughest quarters in years and it was nearly 30% worse off from its January peak. Consecutive monthly declines through the second quarter have reflected a major shift in market sentiment as investors reassess the outlook for interest rates and the US economy.

 

One of the biggest challenges for gold is the Fed’s new stance where, under Kevin Warsh, it has decided to drop its forward guidance. The jobs report aside, markets have increasingly grown in confidence that US interest rates will be hiked and remain higher for longer. This is reducing the appeal of non-yielding assets such as gold. If inflation proves more persistent than expected and the Fed is forced to raise rates again later this year, the pressure on gold could intensify further. At the same time, a stronger US dollar and rising Treasury yields have made it harder for the metal to regain momentum. Yes, it found some relief from the drop in US dollar on Thursday, but this could prove to be a short-term bounce than a trend reversal for gold.

 

While central bank purchases remain one of the market’s biggest sources of support, with many countries continuing to diversify their reserves away from the US dollar, geopolitics has also become less supportive. The US-Iran agreement to re-open the Strait of Hormuz has shifted investors’ focus back towards economic data and monetary policy, meaning there is less haven demand for gold.

 

Gold technical analysis

 

Thanks to the weaker US dollar, gold rallied yesterday and it has extended the rebound so far into today’s session. It has now held above the $4,000 level on a daily closing basis for several sessions, which is a potentially bullish signal.

 

That said, I still need to see stronger bullish price action before dropping my overall bearish gold forecast and concluding that a meaningful low is in place. For now, I’m treating this as a counter-trend rally because the broader trend on gold has been bearish.

 

 

On the daily timeframe, key resistance comes in around $4,195-$4,200. That’s where a bearish trend line comes into play. If gold breaks above it, that will strengthen the bullish technical outlook. However, if we see a reversal from here and gold falls back below $4,100 support area (i.e., the $4098 - $4136 zone, shaded on chart), then this would tilt the near-term gold outlook back to being bearish. For me, gold now needs to close back below the $4,000 level to trigger fresh technical selling in the days and weeks ahead. If that happens, I will resume my bearish outlook on the market. For now, I am neutral on gold from a technical standpoint.

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R