Gold has behaved more like a commodity rather than a safe haven or inflation hedge in recent weeks and this trend remains intact. The general market sentiment is still the US dollar against riskier assets such as commodities and stocks.
The U.S. dollar index has been rising since the start of the year, but gains have accelerated since the start of this month as growth concerns and Fed tightening expectations pushed investors toward the currency.
While there are no major developments to highlight a change in the US dollar’s trend, it is struggling to build on momentum amid a lack of fresh triggers and this has left it vulnerable to profit-taking.
The U.S. dollar index fell 1.2 percent last week, marking its first decline in four weeks, and has corrected more than 2 percent from the 2002 peak set earlier this month. Based on the weekly RSI indicator, the dollar index has been in overbought territory for quite some time now which may have made it vulnerable to a correction.
The US currency lost momentum as it faced challenges from disappointing US economic data and monetary tightening by other central banks.
Economic data in the US has been mixed, but some disappointments last week pointed to increased stress in the economy. US weekly jobless claims rose to the highest in eight months. The Philadelphia Fed’s July factory index fell for the second month in a row in July. The leading index fell for a fourth month in a row, fueling talk of a recession. At the same time, the services PMI fell below 50 points, indicating a contraction in the sector.
The outlook for the US economy has worsened as the US Federal Reserve has begun aggressive monetary tightening to control inflation. With gloomy economic readings, market participants expect the Fed to take a more measured approach.
The rise of the dollar in recent months has also been based on expectations that the central bank could lead other central banks in monetary tightening. The US currency lost momentum last week, also as the European Central Bank joined other central banks in monetary tightening
The ECB raised interest rates for the first time since 2011, deciding to raise lending rates directly by 0.5 percent, surprising few who expected a gradual approach. The ECB began its cycle of rate hikes to curb inflation, but the future pace of rate hikes remains uncertain.
The Japanese yen also managed to rally against the US dollar last week, even as the Bank of Japan kept monetary policy unchanged as expected and reiterated support for an accommodative monetary policy. However, the BOJ raised its inflation forecasts, indicating caution in the face of rising price pressures.
The development of the US dollar has been the key factor, not just for gold but for commodities in general, and the next test for the US currency is the Fed’s monetary policy decision on July 27. There has been increased debate over whether the Fed could continue with a 75 basis point rate hike or consider an even larger and unprecedented 1 percent hike to get a handle on inflation. The general market expectation is that the central bank could continue with the current pace of 0.75 percent hike. If the central bank meets the market’s expectations, it could be seen as a sign that the central bank may avoid aggressive measures to support the economy. The recent correction in the dollar shows that we are already moving in that direction, but if the Fed shows any signs of slowing, we could see further losses in the US currency which could support commodities in general.
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