Potential spot gold trade

Renewed USD strength has really crunched gold, as the precious metal has now lost the $1,200 handle.

Source: Bloomberg

The US dollar index (DXY) rallied to a high of 86.69 after the greenback gained significant ground against most of its major peers. This has seen the DXY trade at its highest level since June 2010, with the currency being spurred on by a strong non-farm payrolls reading.

Essentially, the implication of the strong reading is that the Fed will turn much more hawkish, particularly given most Fed members have been recently insisting a lift-off in rates will be primarily data-dependant.

The FOMC minutes will be released this week and traders will be looking for signs of broadening dissention within the committee. Fedspeak this week is also likely to be the primary driver of rate hike expectations, with 14 members on the wires.

Gold slipped from trading at around $1,220 down to around $1,185, its lowest since December 2013. This level really has to hold in the near term, and the fact China has been on holidays is probably not helping to put a floor in prices.

With Fed members likely to start turning increasingly hawkish, I feel strength will be used as an opportunity to sell and lead to a retest of December 2013 lows. Traders should potentially consider selling gold on rallies into $1,204, with stops placed above $1,220 and initial targets to December lows ($1,183).

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