Gold price oversold while USD price overbought

Recent US data has supported the notion that the US economy is still steaming ahead, lowering expectations that the Federal Reserve may need to cut or even pause rates this year. Weekly jobless claims and manufacturing data release on Thursday (18 May 2023) has come in ahead of consensus. This has been accompanied by hawkish comments by Fed official Lorie Logan who suggested that a pause in the hiking cycle at June’s central bank meeting may not be ‘appropriate’.

The news has supported further strength in the US dollar, which has extended its rebound from oversold levels. The stronger dollar has in turn been weighing on commodity prices, most notably dollar denominated gold.

Commentary from Fed Chair Jerome Powell is expected on Friday afternoon (19 May 2023). Markets will eagerly assess the tone of his commentary in lieu of recent economic data and ahead of June’s Federal Open Market Committee (FOMC) meeting. This combined with outcomes from debt ceiling negotiations ahead of the 1 June 2023 deadline, are likely to be paramount to whether short term strength in the dollar is maintained or not, and with it the short-term prospects for the gold price as well.

Gold price (yellow) vs US dollar index (basket)

The above chart highlights the inverse correlation of the US dollar index to that of gold. While the longer-term trend for the dollar has been down, for gold it has been up. In the near term we are seeing the gold price falling while the dollar has been rising.

US dollar index overbought

The US dollar index is now testing the 103.15 resistance level. The move higher has pushed the index into overbought territory, while the long-term trend remains down. Traders respecting the long-term trend might wait to see a bearish price reversal before one of the labelled resistance levels, to suggest the end of the current rebound, before looking for short entry on the dollar index.
Only on a move above the major high at 105.30, would we reassess our long-term trend bias for the US dollar index.

Gold oversold

The price of dollar denominated gold is continuing its short-term price correction from all-time highs. The short term move lower has moved the commodity into oversold territory, while the longer-term trend remains up.

Traders respecting the longer-term uptrend might now consider long entry should the price manage to form a bullish price reversal around either the 1945 or 1920 support levels.

Should the lower 1920 support level not hold, we would instead reassess the longer-term trend bias for gold.