Gold tumbles as the dollar hovers near recent highs

Updated September 16, 2022

Headlines

*Dollar holds ground Friday ahead of Fed, yuan under pressure

*Gold sinks to two-year low as rate hikes loom

*China retail sales, industrial production beat expectations in August

*Asian markets weaken as IMF, World Bank flag recession risks

USD traded in a narrow range close to Tuesday’s high. The euro closed marginally higher and above support at 0.9952. GBP lost 0.61% below 1.15 and a new week’s low. USD/JPY traded in a relatively narrow range before closing at 143.52. USD/CAD advanced above major resistance at 1.3223. NZD made new cycle lows below 0.60, while AUD breached 0.67.

US equities slid again with the tech-heavy Nasdaq worst hit. It closed lower by 1.7%, the S&P500 -1.1% and the Dow -0.56%, its lowest close since mid-July. Cyclicals continue to weigh on indices and yield sensitive sectors like tech are still underperforming. The risk-off mode has been seen in Asia markets. US futures are firmly in the red to end the week.

Day Ahead – Gloom in the air

It seems markets are still digesting the sticky and elevated US CPI data. “High for longer” has replaced “low for longer”. That is to say both inflation and rates will be staying higher for longer. Ultimately, this means the Fed appears determined to potentially cause a financial accident to get inflation back to its target of 2%.

US retail sales for August were stronger than anticipated. This solid consumer spending keeps the pressure on Fed rate hikes. The debate over 75bps or 100bps will run up to next week’s FOMC meeting. And then onto the following meetings this year. The S&P500 fell to a three-month low and certainly looks weak with everyone looking at the June lows at 3636.

Chart of the Day – Gold breaks down

Last Friday we said it’s all about yields and the US dollar as the main drivers for the yellow metal. As real yields move above 1%, the widely watched 10-year US Treasury yield inches closer to 3.5%. Non-interest bearing assets like gold become much more unattractive in this environment. The dollar meanwhile looks like it is in bullish consolidation mode just below recent highs.

Gold dropped to $1660 yesterday, down more than 2% to over two-year lows. The bearish channel remains in full effect. More aggressive rate hikes are being priced in by the Fed. The terminal rate is now seen pushing towards 4.5%. Long-term support at $1667 now becomes resistance. The 200-week SMA is in this zone at $1676. The weekly close is key. Nest support is $1661 and $1600.

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