Gold rallies as dollar slumps on dovish Fed

It has been a day of two halves for equity investors. Earlier this morning, the global stock markets were down across the board as investor sentiment was dominated by the uncertainty over Greece. But the markets then turned higher and the buying momentum accelerated when Wall Street opened for trading. Sentiment was lifted first and foremost on hopes over a possible deal for Greece today and after the Fed last night delivered a dovish message as it said that economic conditions are still not quite right for a rate increase and that future hikes may be slower and as ever data-dependant. At the press conference Janet Yellen re-iterated that monetary policy will be assessed meeting by meeting and that the importance of the first rate hike should not be overstated. In a delayed response, US stock markets have surged higher today. The dollar however had responded instantaneously last night, dropping against most currencies. The greenback has extended its decline today on the back of a slightly weaker-than-expected increase in US CPI. The significantly weaker dollar has also underpinned buck-denominated gold and silver quite noticeably today. But we remain sceptical about gold because of the fact it has hardly responded to raised concerns about Greece in the recent past – today being the exception. In other words, the behaviour of price action calls into question the metal’s status as a safe haven asset. What’s more, if equities continue to push higher then gold’s appeal may correspondingly fall.

From a technical point of view, gold’s next move could be determined by what it does around the key $1205 area, which is being tested at the time of this writing. As can be seen on the chart, several technical factors converge around this area, making a potential pullback here likely as we head into the second half of the US trading session. As well as this area being previously resistance, the 200-day moving average and the 61.8% Fibonacci retracement level of the last downswing come into play here. Thus a potential pullback towards the $1190 and potentially beyond could get underway now. However, if the abovementioned resistance area is taken out then the next hurdle is at $1210 which corresponds with the bearish trend line. Beyond that level is the May high at $1332/3 and then the 61.8% retracement of the price swing from January, at $1244/5. Indeed, gold has made a couple of higher lows already. So, who knows, price may have already formed a base and could be on the verge of a big breakout. For now though, we remain sceptical until proven wrong.