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Gold price oversold while USD price overbought

Better than expected US data is helping gains in the dollar while the gold price continues to correct.

Source: Bloomberg

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)

Source: Refinitiv

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

Source: IG

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

Source: IG

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.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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