Gold presents opportunities while the US dollar has run out of steam

Gaurav Kashyap says bullish optimism is waning for the precious metal and the greenback

FILE PHOTO: Gold bullion is displayed at Hatton Garden Metals precious metal dealers in London, Britain July 21, 2015. REUTERS/Neil Hall/File Photo

It’s been a difficult month for gold. The precious metal continued to trade well below 1300 levels during April, its third consecutive month at a lower price after hitting 1347 back in February.

Technically, gold is approaching some key levels. On the weekly charts, the precious metal needs to hold above its current 1273 handle where the 50-week moving average sits. Closing below this week would expose 1267, which is a strong support followed by 1227 in the medium term. The most recent Commitment of Traders report, which tracks the positioning of market participants, showed that the number of gold longs dropped by 49,000, which suggests that although the market is still long for the commodity, the bullish optimism is waning.

Gold presents some excellent opportunities – having said this, it would be difficult to initiate short positions here, and instead I would look to buy the precious metal on dips, particularly from the 1267 handle. Gold’s future performance is inversely linked to the performance of the greenback, which has been on its own upside move since February.

While the Dollar Index has yet to close above 97.30 levels on a monthly basis, the greenback seems to have run out of steam and is instead consolidating in the current 96.50-97.30 range. The same COT report shows that although traders reduced their net long dollar positions, they were still long on 28,938 contracts, the highest level since the end of January.

While my bullish dollar tones from the past year may have lost a little lustre, a closing above 97.30 levels in April could spark a technical rally higher towards 100 through to the start of the third quarter. Fundamentally though, this may not be so straightforward. In the past six months we have seen the Federal Open Market Committee adopt a more dovish tone towards future rate hikes; they famously cut their expected rate hikes to zero for 2019 earlier this year.

Despite this, the Dollar Index is still treading above 96.50 levels which suggests an upside breakout could be on the cards. Of course the US data docket will drive US dollar pricing in the interim; weaker data will weigh down dollar prospects and vice versa, and we will continue to await developments from the US-China trade war story in the medium to longer term.

Keep an eye out for the quarter-on-quarter US gross domestic product data for the first quarter of 2019, which is due out on Friday. Following a previous reading of 3.4 per cent, markets are expecting the figure to come in slower at 2.1 per cent during the first quarter. Any level above that will no doubt see a nice bump in US dollar prices.

I am also looking forward to the FOMC statement due out next week. Again, with no rate hike expected its going to be about the Federal Reserve's tone in regards to how growth prospects are panning out. Any signs of optimism could see some more upside moves in the short term. The US non-farm payrolls report, due early next month, will offer some insights into how the job market is doing. Unfortunately, the impact of the payrolls report on markets have been lacklustre to say the least, but it remains a good indicator of how the Fed views the progression of the US economy.  US Core inflation data, also set for release in May, is expected to come in at 0.2 per cent, slightly higher than the 0.1 per cent recorded previously.

The euro and British pound continue in their bearish trend – a view I maintain going forward indefinitely. Starting with the former, the dovish prospects of the European Central Bank will underpin this downside move and technically, we have seen strong selling pressure coming into the EUR/USD towards 1.1350 levels. The EUR/USD pair may be a good currency for short term opportunities – selling around this 1.1330-1.1350 channel and covering at 1.1250 levels. I would not look to create long positions in the pair before 1.1180 levels.

Finally the British Pound closed last week below 1.30 levels, which represents a key technical move for me. For the past nine weeks the GBP/USD gyrated between 1.30 and 1.33 as Brexit developments drove sterling. However, with an extension in those talks to the third quarter, the pound’s breakdown suggests there are more downsides to come – especially if there continues to be weekly closes below 1.3070 levels.

Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti