Gold analysis: Metal rebounds along with stocks as dollar dips

The US dollar eased back a little at the start of Thursday’s session and this allowed everything to bounce, including European stocks, US futures and gold prices. Signs that Chinese state funds are coming to help the lock equity market helped soothe investor nerves, as too did some better-than-expect corporate results from the likes of Richemont, dragging other luxury-goods stocks higher with it. Chipmakers rebounded after Taiwan Semiconductor Manufacturing Co., which supplies Apple and Nvidia chips, said it expects a return to strong growth this quarter. Attention will remain on Fed speak, incoming US data and the direction of risk assets after the sharp reduction in risk appetite in the previous couple of sessions. If there’s no fundamental change to trigger a dollar sell-off, gold could resume lower, having failed to maintain its post-CPI gains made at the end of last week.

Can calmer market conditions last?

The sizeable recovery in stock indices in the first half of Thursday’s session suggests things are a lot calmer today, but that’s not to say conditions will remain that way.

Right now, everyone's coming to the realisation that big central banks like the Fed, ECB, and BoE might not lower interest rates as much or as soon as the market thought they would. The US central bank is holding off partly because its economy is doing better, but in the UK and Eurozone, it's more about inflation remaining sticky, especially with wages staying high.

The ECB President dropped a hint on Wednesday, saying that borrowing costs might go down in the summer instead of the spring as expected. Some other ECB official have also expressed concerns about wage inflation. Christine Lagarde is set to speak again at 15:15 GMT today, before which we will get the release of the ECB’s meeting minutes at 12:30 GMT.

Gold investors are thus wondering how much of a negative impact delayed interest rate cuts might have on prices. They will want to see gold hold its own above key support around the $2000 area now.

If it wants to hold its ground around current levels, we'll need to see a bit more improvement in how people are feeling about taking risks, while a bunch od US data misses could also help gold’s cause.

Gold finds relief from weakness in US dollar

The momentum of the US dollar has stalled, aligning with a positive start to Thursday's session in terms of risk sentiment. Investors will be keeping an eye on today's calendar, which includes housing starts and initial claims, though these aren't considered top-tier data releases. Today's Fed communication will feature comments from the centrist Raphael Bostic.

In recent days, the US dollar has gained support due mainly to stronger data reducing the probability of a rate cut in March and the total number of potential rate cuts for 2024 as a whole. This week's upswing in the dollar was triggered by Fed governor Christopher Waller, who, while acknowledging the positive trend in inflation, advocated for a measured approach. He cautioned against rushing into near-term rate cuts, emphasizing the resilience of the US economy and playing down expectations of an immediate reduction in interest rates.

Despite worries about interest rates reaching a 22-year high, we've seen stronger-than-expected reports on CPI, jobs, and retail sales in the past couple of weeks. So, let’s see what happens from here on. If US data continues to remain resilient, then this could weigh on gold, while a bearish turn for data is going to support it.

Gold analysis: key levels to watch

The technical outlook on gold remains bullish in the long-term, but not so clear in the short-term. It will need to break the bearish trend line that has been in place since it hit a record high in December, to signal a bullish reversal. Short-term resistance is seen in the $2017-$2025 area. A daily close above this range would be ideal for bullish investors. The bears meanwhile will be eyeing a decisive break below $2000 key support to potentially trigger a drop towards the 200-day average.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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