Gold retreats to $2,500 as USD recovers

• Gold is correcting as the US dollar recovers from year-to-date lows.
• Mixed US economic data has the market cautious about whether the Fed will cut by 0.50% in September.
• Going long heavy in gold is another headwind for bulls trying to push the price higher.

Gold (XAU/USD) is changing hands just above $2,500 on Wednesday after falling on a rally in the US dollar (USD). Given that gold is primarily priced in USD, any strength in the greenback tends to weigh on its price. The U.S. dollar index ( DXY ) rose more than a third of a percent to 100.90 on Wednesday, rebounding from a year-to-date low of 100.51 the previous day.

US data was mixed on Tuesday, with the Conference Board’s gauge of consumer confidence in August rising to 103.3 and beating expectations for 100.7. Optimism from the US consumer provided further evidence against a hard landing scenario for the US economy. Labor market indicators, however, “fell to their weakest levels so far this cycle, supporting concerns about a recent slowdown in the labor market,” according to Jim Reid, strategist at Deutsche Bank.

Gold retreats as concerns about the US economy moderate

Gold is lower on Wednesday as data from the past few days paint a mixed picture of the state of the US economy. The Richmond Fed manufacturing index came in at -19 in August from -17 previously, when it had been forecast to improve to -14. Meanwhile, U.S. housing data was mixed, with home prices falling 0.1 percent month-on-month in June, versus expectations for a 0.2 percent increase, but the S&P/Case-Schiller home price index revealing an increase of 6, 5% year-over-year vs. 6.0% expected. .

The data follows months of better-than-expected US durable goods orders that showed a sharp 9.9% rise in July – the most since May 2020 and helped reassure investors with regarding the US economy.

Despite these releases, market expectations regarding the path of US interest rates appear little changed. The likelihood of the Fed making a mega 0.50% rate cut in September remains in the mid-30% range, according to CME’s FedWatch tool. That’s where he was after Federal Reserve (Fed) Chairman Jerome Powell made the clearest signal yet that tapering is underway at his Jackson Hole speech. That said, 3-month US Treasury yields are up on Wednesday, while longer-dated bond yields are down, which could suggest bond traders aren’t confident the Fed will go for a 0. 50% Such a move, if it were to occur, would benefit gold, which, as a non-interest-paying asset, tends to post gains the further interest rates fall.

Traders are now looking to the Fed’s favorite gauge of inflation, the Personal Consumer Expenditure (PCE) Price Index, released on Friday, for a clearer indication of where the Fed might go on interest rates. Thursday’s second estimate of US Gross Domestic Product (GDP) data for Q2 could hurt expectations, while Wednesday’s thin file offered only comments from Atlanta Fed President Raphael Bostic. Nvidia (NVDA) earnings will be released after hours.

Extreme long positioning continues to be a problem for gold bulls trying to push the price higher, according to Daniel Ghali, senior commodities strategist at TD Securities.

“Our assessment of macro fund positions in gold is now at the highest levels recorded in the depths of the pandemic. This red flag marked the local highs set in September 2019 and previously in July 2016,” says Ghali.

“Downside risks are now stronger. The ship is crowded. In fact, it was hardly as crowded as it is today. Do you have a secure slot on the lifeboat?” adds the strategist.

Technical Analysis: Gold falls back after retesting $2,530 highs

Gold (XAU/USD) is falling again after retesting the $2,530 level. Overall, it remains in a consolidation above its old range. Despite the recent break, gold remains in a near-term uptrend that, given the trend is your friend, favors longs over shorts.

XAU/USD 4 Hour Chart

The breakout of the range (which resembles an incomplete triangle pattern), occurred on August 14 and generated a bullish target at around $2,550. This was calculated by taking the 0.618 Fibonacci ratio of the range height and extrapolating it higher. This target is the minimum expectation for a continuation after a breakout based on the principles of technical analysis.

A break above the August 20 all-time high of $2,531 would provide confirmation of a higher continuation towards the $2,550 target.

Alternatively, a back-to-range break would nullify the up-projected target. Such a move would be confirmed at a daily close below $2,470 (August 22 low). It would change the picture for gold and cast doubt on the short-term uptrend.

However, gold is in an upward trend over the medium to long term, which further supports an overall bullish outlook for the precious metal.