Resistance ahead for gold bugs

Overnight Headlines

*USD closes marginally higher but below key support

*US equities hit by tech losses with Nasdaq down 2.55%, futures lower

* US inflation data fears grow amid soaring commodity prices

US equities turned sharply lower with a big divergence in performance. Growth stocks like Tech got hammered while value and defensives outperformed. FAANG were all down between 2-3% and the small cap index -2.6% while the Dow with its value sectors such as materials and banks was down just 0.1%. Futures are pointing the same way for the Nasdaq and Russell 2000 with European bourses set to open more than 1% lower.

USD was mixed against its major peers as commodity prices accelerated higher while tech led stocks lower after a quiet start. The USDX doji candle suggests indecision but after Friday’s strong move lower, some consolidation is to be expected. EUR/USD closed below the April high at 1.2150 so 1.21 is the next major support.

Market Thoughts – Inflation, inflation

We wrote about rising commodity prices a few weeks ago and the cost of raw materials, from copper to iron ore and lumber have continued to record new highs. Will this be “transitory” as policymakers make out or more persistent enough to make them change their course?

There are a host of Fed speakers this week who traders will listen to attentively and the latest US inflation data is released tomorrow. The markets have pushed their expectations for inflation to new multi-year highs, breaching 2.5% for the first time since 2013 in the 10-year space, while real yields are drifting back towards -1%. The difference between these two rates characterised the majority of last year and is what has been playing out again since mid-April.

Chart of the Day – Gold breakout may slow short-term

We were bullish for gold prices at the start of last week and bugs burst through the $1800 mark last Thursday pushing prices to the upper Keltner band and the double bottom target around $1835. The current environment of falling real yields and rising inflation expectations is ideal for the precious metal.

Technically, momentum indicators are maintaining their bullish skew but a confluence of resistance is just above at $1852-56 with the 200-day SMA, a Fib level and an old high/failure. Longer-term traders should check out the bullish breakout of the declining channel on the weekly chart with targets at $1880 and $1900 but bulls need to battle the near-term resistance zone just above over the next few days.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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