Gold market trends (XAU/USD) climbed to $2,340 on Monday after the release of US ISM Manufacturing PMI data, which showed a sharper-than-expected contraction in May. This has fueled speculation that the Federal Reserve might reduce interest rates as signs of an economic slowdown become more apparent.
The ISM Manufacturing PMI fell to 48.7 in May, down from April’s 49.2, missing expectations of 49.6. This unexpected contraction raised the probability of a Fed rate cut in September from 55% to 59%, according to the CME FedWatch tool. Lower interest rates typically benefit gold, as the opportunity cost of holding this non-yielding asset decreases.
Gold Poised to Stay Strong This Summer
Gold market trends is expected to remain strong over the summer as investors watch for potential rate changes by major central banks and sustained demand from Asia. According to Bart Malek, Head of Commodity Strategy at TD Securities, although gold prices dipped from April’s highs after the Federal Reserve delayed expected rate cut expectations, the metal has stabilized.
Weak US economic data, like the recent core PCE undershoot, has led speculators to cover short positions, limiting gold’s downside and providing support. Despite this, a significant rally is unlikely until policymakers receive more evidence that current rates are successfully managing inflation.
Asian demand, particularly from China, has further supported gold market trends, helping counteract the devaluation of the Renminbi. This demand acts as a hedge against currency depreciation, adding to gold’s strength during this period.
Technical Analysis: Bearish Patterns in Gold
On May 29, gold prices broke out of a rectangular consolidation zone, suggesting the formation of a Bear Flag pattern. Typically, a Bear Flag features a steep initial decline followed by a period of consolidation. The recent breakout sets a downside target of $2,295, based on the 0.618 Fibonacci extension from May 21-23.
Since the breakout, gold has continued to trend lower, confirming the bearish outlook. Prices have recently dropped to $2,314, just $11 away from the initial target, reinforcing this trend.
XAU/USD 4-Hour Chart Analysis
Gold’s 4-hour chart shows a pattern of falling peaks and troughs, along with a significant break of a trendline, indicating a short-term downtrend. Further declines are possible, with targets in the $2,272-$2,277 range, corresponding to historical support levels and the 100% extrapolation of the previous move.
Despite the bearish short-term outlook, the medium to long-term trends remain bullish. A break above $2,362 would challenge the short-term downtrend, but until then, further weakness is expected.
Conclusion
Gold prices have reacted positively to the recent contraction in US manufacturing data, leading to speculation of potential rate cuts by the Federal Reserve. While short-term technical analysis suggests a bearish trend, gold is likely to remain well-supported through the summer due to ongoing demand from Asia and the broader economic outlook.
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