Gold Analysis: USD softens, gold higher ahead of a US inflation report

Market Summary:

• Wall Street was higher on Tuesday in anticipation of a softer set of inflation figures (even if the absolute levels remain high by historical standards)
• Banks shares were lifted on hopes of stronger earnings reports this week, and JP Morgan (JPM) closed to a near 5-month high after a Jeffries upgraded the stock to a ‘buy’ ahead of Friday’s earnings report
• Outstanding loan growth in China grew 11.3% y/y to ¥3.05 trillion in June (2.34 expected) to show a welcomed pickup in demand for the economy, whilst M2 money supply rose 11.6% y/y in attempt to stimmy to rate of deflation
• Australian consumer sentiment has risen 2.7% from “deeply pessimistic levels” according to Westpac thanks to a reported fall in inflation, although consumers remain wary of the interest rate outlook
• Westpac only expect a rise in confidence to be sustained if inflation falls much further and rates remains on hold (which I believe to be unlikely)
• In a separate report, Australian household spending rose 3.3% y/y and spending on services rose 7.2% y/y. Elevated levels of services inflation remains a key concern for the RBA, and today’s figures suggest it will remain elevated for a while. Sure, a cutback of discretionary spending shows some caution among the masses but, on aggregate, household spending isn’t exactly screaming for the RBA to stop hiking. Especially if the Fed are likely to hike at least once or twice more.
• Economic sentiment for Germany and the Eurozone were weaker than expected, adding further concerns to an economic slowdown (but with it bring hopes of a less hawkish Fed)
• UK wages continued to accelerate which increased the odds of another 50bp hike from the BOE, and sent GBP/USD up to a fresh 15-month high

Events in focus (AEDT):

• 09:50 – Japan’s core machinery orders and producer prices will be in focus, which could see the yen strengthen further if they come in hot as traders seem to be placing bets that the BOJ will exit their ultra-dovish policy sooner following stronger household spending (demand-driven inflation)
• 12:00: RBNZ are expected to hold their cash rate today, given their OCR projection in May outlined a terminal rate at the current rate of 5.5% and New Zealand has since entered technical recession.
• 13:00 – RBNZ Governor Orr delivers a press conference post OCR decision
• 22:30: US CPI will be today’s main calendar event, with core CPI expected to fall back to 19-month low of 5% y/y (down from 5.3%) or 0.3% m/m – which is actually its long-term average. If core CPI came in at 0.2% or lower, we’d the initial reaction could be a weaker USD with higher stocks and gold as traders bet on a ‘one and done’ Fed hike this month. Even if two more hikes still seems likely.

Technically Speaking:

• AUD/USD and NZD/USD remain near their range highs ahead of today’s RBNZ cash rate decision, but with the RBNZ expected to hold it may require a hawkish message, press conference or weaker set of US inflation figures for them to break higher

• The 200-day MA sits just beneath the 0.6705 high for AUD/USD and the 200-day EMA sits on the 0.6225 high on NDZ/USD, with both pivotal levels providing a potential area for bears to fade into or bulls to enter should we see a breakout
• The US dollar continued to weaken in anticipation of softer US inflation, sending USD/CHF to a fresh YTD low and EUR/USD to a 9-week high before pulling bac to just beneath the June low with a Spinning Top day
• USD/JPY continued lower for a fourth day, stopping just shy of the 140 handle as it found support at the 50-day EMA (keep an eye Japan’s data at 09:50 AEDT for its next move. Ahead of the Tokyo open at 10:00)
• AUD/JPY fell for a fifth day as the yen continued to broadly strengthen on hawkish BOJ bets
• WTI crude oil rose to a 5-week high, just beneath the $75 handle and high of the day Saudi Arabia cut oil supply. Next resistance levels are $75.67 (YTD open) and $76
• The Nikkei 225 formed a bearish inside day above Monday’s low and held above 32k, and with a positive lead from futures markets and RSI (2) been in the oversold level for three day, a bounce higher could be on the cards
• The Marabuzo line also sits near the monthly S1 pivot, so any pullback towards 7040/50 could be tempting for bulls (perhaps a hawkish RBNZ meeting could help it retrace)
• Take note that the 200-day MA and 50% retracement level sit around 7150, so an initial retracement lower would desirable to increase the potential reward to risk ratio for bulls

ASX 200 at a glance:

• The ASX 200 broke its 4-day losing streak to post its strongest day’s gains since January 3^rd
• The daily chart formed a bullish engulfing candle which opened at the low and closed at the high of the day, which is also known as a Marabuzo candle (shaven head in Japanese)
• The 50% retracement between the open and close (the Marabuzo line) sits around 7050, which can provide a potential level of support if prices retrace towards it

Gold daily chart:

Gold rose to the top of its 1900 – 1937 range on Tuesday. Whilst it closed at a 3-week high,  the 1937.6 low and monthly pivot point capped the rally, which leaves a potential resistance zone for bears to fade into ahead of today’s US inflation report. We may find that volatility is lower, but then again there’s also a chance we could see pre-emptive bets of a soft US inflation report to send gold grinding higher as part of a ‘buy the rumour’ move. It would then be down to the figures as to whether they may ‘sell the fact’ to send gold lower if it comes on target, with a hotter print likely sending gold prices sharply lower. If we’re treated to softer-than-expected figures, we have 1960 or 1970 has initial upside targets. For those that prefer to news to be released before looking for a technical entrance, bulls could seek bullish setups on lower timeframes if or when a level of support has been established.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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