Gold slips below $2,500 after USD recovery

• Gold is testing the bottom of a mini-range at $2,500.
• The increase is capped by a recovery in the US dollar amid easing concerns about the US economy.
• Labor market data released this week could be key, with nonfarm payrolls the main release on Friday.

Gold (XAU/USD) is down and testing $2,500 on Monday as the recovery in the US dollar (USD) in recent days weighs on the precious metal. Gold is negatively correlated with the USD, in which it is largely priced and traded.

Gold wings clipped by US dollar recovery

The price of gold is facing headwinds against the US dollar (USD) at the start of the new week after the greenback recovered from year-to-date lows hit last Tuesday when the US dollar index (DXY) hit 100, 52. It is now trading back in the 101.60s after Friday’s release of US personal consumption expenditure (PCE) data for July showed inflation was unchanged from the previous month. This, in turn, has reassured markets that the US economy is likely headed for a “soft” rather than a “hard” landing.

The outlook for US interest rates, another major driver for the precious metal, remains about the same, with the odds of a 50 basis point (bps) cut in September still just above 30% and a 25 basis point cut fully priced , according to the CME FedWatch tool.

Trading conditions will be thin on Monday as both the US and Canada are on holiday for Labor Day. This week’s employment data – culminating in Friday’s non-farm payrolls (NFP) – will still be a key determinant of whether the Federal Reserve (Fed) opts for a large halving to percent or a more standard discount of a quarter percent.

Technical Analysis: Mini-range trading continues

Gold (XAU/USD) continues to trade in a low range between $2,500 and $2,531. The short-term trend could now probably be characterized as “sideways” and therefore more likely than not to continue to oscillate until a breakout occurs.

Gold’s medium to long-term trends remain bullish, which, given the trend is your friend, means the odds favor an eventual bigger breakout materializing.

XAU/USD 4 Hour Chart

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

Alternatively, a break back into the previous range would negate the projected bullish 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 suggest that the commodity could begin a short-term downtrend.