Gold support level (XAU/USD) is testing its support level at $2,500 this Monday, influenced by the recent recovery of the US Dollar (USD). This relationship between gold and USD is crucial because gold is often priced and traded in USD. As the USD strengthens, it tends to weigh on gold prices.
Gold’s Response to US Dollar Strength
Gold faces downward pressure at the beginning of the week due to the USD’s rebound from its year-to-date lows. The US Dollar Index (DXY) dropped to 100.52 last Tuesday but has since risen to around 101.60. This change follows the release of July’s Personal Consumption Expenditures (PCE) data, which showed stable inflation. This stability suggests that the US economy might experience a “soft” landing rather than a more severe downturn.
Interest Rates and Market Impact
The outlook for US interest rates remains stable, with a 30% chance of a 50 basis point (bps) cut in September. The possibility of a 25 bps cut is fully anticipated, according to the CME FedWatch Tool. With both the US and Canada observing Labor Day on Monday, trading volumes are expected to be light. However, upcoming employment data, including Nonfarm Payrolls (NFP) on Friday, will be crucial in determining whether the Federal Reserve will implement a significant or minor rate cut.
Technical Analysis: Gold’s Trading Range
Gold support level (XAU/USD) is currently trading within a narrow range between $2,500 and $2,531. The short-term trend appears sideways, indicating that gold is likely to continue fluctuating within this range until a breakout occurs.
In the medium and long term, the bullish trend suggests a favorable outlook for gold. The breakout from the previous range, which formed an incomplete triangle pattern, set an upside target around $2,550. This target is derived from the 0.618 Fibonacci ratio of the range’s height.
Potential Breakout Scenarios
A move above the August 20 high of $2,531 would signal a continuation toward the $2,550 target. Conversely, if gold falls back into the previous range and closes below $2,470, it could indicate a shift towards a short-term downtrend.
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