The gold price has risen to nearly $3,370 during the European session, following a slight correction in the US Dollar. This increase comes as traders adjust their expectations regarding Federal Reserve policy after analysing June’s US Consumer Price Index data.
US Dollar Performance
The US Dollar Index (DXY) fell to around 98.15 from a previous high of approximately 99.00. Meanwhile, the US Dollar showed a general decline against major currencies, being weakest against the British Pound.
Fed rate cut probabilities for September have decreased to 58.5% from nearly 70% a month prior, as assessed by the CME FedWatch tool.
Gold price trades within a Symmetrical Triangle pattern on the daily chart, suggesting reduced volatility. Critical support is near the 20-day EMA around $3,340, with resistance levels at $3,550 and $3,600 if price exceeds $3,500.
Gold is valued as a safe-haven asset during economic turmoil and is used as a hedge against inflation. Central banks, aiming to diversify reserves, are the largest holders, with significant purchases made in recent years.
Gold generally displays an inverse correlation with the US Dollar and risk assets, often rising when the Dollar depreciates. Various factors, such as geopolitical instability and interest rates, can influence its price.
Market Positioning and Strategies
Based on the current market environment, we see the recent dip in the US Dollar Index to the 105.50 level as a minor correction, not a reversal. Trader positioning is shifting after the latest US Consumer Price Index showed annual inflation at 3.3%, slightly cooler than expected but not enough to force the Federal Reserve’s hand. This creates a state of policy uncertainty that directly impacts precious metals.
The decreased probability for a September rate cut, which now hovers around 65% according to the CME FedWatch tool, suggests that conviction is weakening. We believe this indecision will keep gold prices contained in the near term, limiting aggressive upside moves. This environment of wavering expectations is reflected in gold’s price action.
Given the reduced volatility implied by the Symmetrical Triangle pattern, we suggest traders could implement a long straddle strategy. This involves buying both a call and a put option, positioning a portfolio to profit from a significant price breakout in either direction once the pattern resolves. Such a move is likely as new economic data forces a clearer policy path from central bankers.
Historically, gold tends to rally in the months preceding the first interest rate cut of a new cycle, as it did leading into the 2019 easing period. Supporting this view, the World Gold Council reported that central banks purchased a record 290 tonnes in the first quarter of 2024, creating a strong floor under the market. This underlying demand makes selling cash-secured puts below key support levels an attractive strategy for collecting premium.
We are watching the 20-day EMA, currently near $2,330, as the key battleground. A firm break below this level could trigger a deeper correction, while a sustained move above resistance around $2,400 would signal the next leg up. Derivative traders should therefore set their strike prices for options strategies around these pivotal technical markers in the coming weeks.
