Gold is Being Pulled Between a Hawkish Fed and New Geopolitical Concerns

By Giles Coghlan, Chief Market Analyst, consulting for HYCM

This is despite last week’s news cycle offering items with contradictory implications for the precious metal.

Stronger-than-expected US economic data along with a continued hawkish stance from the Federal Reserve has exerted bearish pressure on gold prices, while geopolitical uncertainty following an attempted mutiny by Russian mercenary group Wagner has increased interest in gold as safe-haven play.

US Housing Surprises, Fed Pauses but Remains Hawkish

Last week, US economic data revealed a much stronger than expected housing market, with the NAHB Housing Market Index surpassing expectations to hit its highest level since July of last year. New building permits also beat market expectations, and new housing starts surged to their highest level since May 2022.

Last month, we reviewed the three possibilities of a Federal Reserve pivoting to rate cuts, continuing to hike, or pausing. The June FOMC meeting delivered our most likely scenario of a pause, which we presented as one of the better cases for gold, at least in the short term.

However, what markets received from the June FOMC meeting was a hawkish pause, in which no action was taken, while Chair Powell renewed his hawkish rhetoric, underlining his commitment to the task of bringing down inflation.

In a busy week for FOMC speakers, markets had the opportunity to digest comments from a total of six FOMC members. Jerome Powell also made his semi-annual trip to Capitol Hill, testifying before the House Financial Services Committee, and Senate Banking Committee, where he all-but confirmed that more rate hikes are in store and stated that “we don’t see rate cuts any time soon.”

Gold’s Reaction

The result of this pull between the resilience of the US economy plus a hawkish Fed on the one hand, and growing geopolitical uncertainty on the other, has resulted in muted price action despite the overall bearish trend.

We’re seeing this among investors at HYCM as well, for whom gold is one of the most popular assets this year. Positioning suggests current price action could be a period of short-term profit-taking within a longer-term bullish view.

We can see this reflected in gold’s chart. Between June 20 and 22, which saw the release of US housing data and FOMC speeches, gold prices declined by almost 2.4%.

Between Friday June 23 and Monday June 26, gold prices rebounded by 0.8% as markets attempted to price-in Wagner leader, Yevgeny Prigozhin, halting the advance of his troops on Moscow over the weekend.

Technicals Appear Bearish

Along with Prigozhin’s de-escalation capping the bounce in gold prices, the technical picture remains bearish, with the sell-off early last week having damaged gold’s technicals by sending the precious metal’s price down through two important moving averages.

The 100-day and 20-week moving averages (at $1950, and $1948, respectively) have now been relinquished by gold bulls, leaving the next moving average support for the asset at around $1840 in the case of the 50-week and 100-week moving averages, and $1856 in the case of the 200-day moving average.

If we look at gold’s Fibonacci levels, the sell-off starting June 20 caused gold prices to be rejected from the asset’s 23.6% retracement level at $1948 (coincides with 20-week MA). The next line of Fibonacci support is located at the 38.2% retracement level at $1905. Should this level hold, there’s still a case to be made for gold being in consolidation mode while the broader bullish trend remains intact.

In fact, any low above $1817 can still be regarded as a weekly higher-low, which makes the 50% retracement level at $1850 critical to gold’s broader trend.

What to Look For

A sustained break below the $1840-$1850 range takes gold below its 50% retracement and opens the possibility for gold to set a weekly lower-low, thus breaking the longer-term bullish trend.

This level also happens to coincide with the asset’s 200-day moving average support (red line), so it’s important for market participants on both sides of the gold trade to keep an eye on this price range around $1840-$1850. It would also be a key level that medium term gold buyers may look to lean against.

Gold futures are currently trading at around $1942, having opened higher on the week starting June 26, so there’s barely $100 between the current price and this cluster of important support levels.

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