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Forex Friday: Dollar and Gold

Welcome to Forex Friday, a weekly report in which we discuss selected currency themes mainly from a macro viewpoint, but we also throw in a pinch of technical analysis here and there.

In this week’s edition, we discuss the dollar’s ongoing strength and how this might negatively impact gold prices in the near-term. 


Dollar eases on profit taking ahead of NFP

The US dollar eased off Friday morning from the fresh multi-year highs it reached the day before ahead of the publication of the US jobs report for August. Profit-taking was the name of the game as the EUR/USD climbed back above parity, although the USD/JPY continued to press ahead amid a slightly positive risk appetite with equities also rising a tad.

The dollar started the first day of September on Thursday how it ended the summer, with sharp gains. The USD/JPY hit 140.00 for the first time since 1998 while the GBP/USD plunged to 1.15 handle as it neared the levels last seen during the height of the pandemic. Gold fell below $1700 and WTI slumped below $87 a barrel. “Risk off” was written all over the markets today. Will the nonfarm payrolls report help to halt the dollar and yields rally or will investors press ahead? Following the hawkish speech by the Fed’s Powell on Friday, traders have driven expectations for another 75bps interest rate increase from the Fed above 70%. Another strong jobs report could cement those expectations further. As a result, we may well see further gains for the greenback.

But going forward, the dollar’s bullish trend might weaken given that other central banks are also raising interest rates. The ECB for one has become very vocal about aggressive rate hikes and a 75 basis point raise next week looks likely.


Gold remains on shaky footing

The precious metal has recovered after slumping below $1700 on Thursday. Following a 5-day fall, an oversold rebound is hardly surprising. But it is highly likely to be just that – an oversold rebound. After Powel’s speech last Friday, the market is betting that another 75-basis point hike is on the table in a couple of weeks’ time. The Fed has admitted that it wants to bring down inflation even at the cost of triggering a recession by continuing with its aggressive policy. A very strong report will just help to cement expectations that the Fed will indeed hike by 75 basis points at its next meeting, which should keep the US dollar and bond yields underpinned, and zero- and low-yielding assets such as gold and Nasdaq undermined.

The trend has been negative all year for the metals, with both gold and silver having suffered because of similar reasons: rising interest rate expectations from both side of the Atlantic and a strong US dollar. The latter has underperformed lately due to elevated concerns over the health of the Chinese economy where the nation’s zero-COVID policy and energy issues have hit the sector. But overall, it is all about monetary policy and rising interest rates.

From here, and despite the rebound, it looks like gold is probably going to drop below this year’s earlier low and test the 2021 low at $1676, before deciding on its next move.




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