Both Fundamental and Technical Studies Agree on Continued Dollar Strength and Lower Gold

FOMC Minutes

This week market participants have focused intently on the future actions of the Federal Reserve as it pertains to rate hikes to be announced at the upcoming July and September FOMC meetings. Since 2018 the Federal Reserve has only raised rates on three occasions. However, all three rate hikes were announced and implemented at the last three FOMC meetings (March, May, and June).

Expectations are that the Federal Reserve will raise rates at both of the next two FOMC meetings in July and September. According to the CME’s FedWatch tool, there is a 93.9% probability that the Federal Reserve will raise rates by 75 basis points at the end of this month. This is over a 10% increase from yesterday’s FedWatch tool which predicted that there was an 83.8% probability of a 75 basis point rate hike.

This increase is a reflection of the hawkish minutes from last month’s FOMC meeting which were released today. The release of the minutes from the June FOMC meeting coupled with hawkish statements from many Federal Reserve voting members had a strong bullish influence on the dollar and a bearish influence on gold. Now for the second day this week, we have seen the dollar gain value moving to a 20-year high and gold continue to lose value now at the lowest value since last year.

Current support and resistance levels of gold and the dollar

The current trend of dollar strength and gold weakness could find technical resistance/support close to their current values. Of course, there is an obvious caveat to the statement above. The caveat is that both the dollar and gold have been fueled by headlines that reduce the accuracy of technical studies to forecast financial markets.

The chart above is a weekly Japanese candlestick chart of the dollar index. It contains a Fibonacci extension that looks at the rally that began in 2014 when the dollar index had a value of 79 up to the conclusion of the rally at 103.95 that occurred during Q1 of 2017. The Fibonacci extension measures the increase of value in the dollar during that rally and begins the extension after a correction in 2018 when the dollar fell from 103.95 to 88.

The key levels to look at in a Fibonacci extension are 61.8%, 78%, and 100%. The 61.8% Fibonacci extension occurred at approximately 104 which was the major resistance level from 2017 until May of this year when the dollar surged past 105. This price point is now most likely a key level of support. The next level (78%) at 107.46, is now in striking distance with the dollar index trading to a high of 107.07 today.

Gold futures have declined by almost $80 over the last two days. However, technical chart damage first occurred on Friday, July 1 when gold closed below a major support trendline. Yesterday gold opened below that trendline and closed below the 78% Fibonacci retracement that we identified in yesterday’s article.

Therefore, the next logical level to look for technical support occurs at $1720. This is based upon the closing price during the flash crash in August that took gold to an intraday low of $1678 and the low that occurred at the end of September, in which both days closed at $1721.

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Wishing you as always good trading,

Gary S. Wagner