Gold glistens as the US dollar plunges (XAU/USD, DXY)

“The dollar index (DXY) formed a bearish engulfing week by Friday’s close, and if recent history is anything to go by they tend not to come in isolation and can mark the beginning of corrections”

From the article on November 8, 2023: USD moves cautiously higher (for now) ahead of Fed speakers

It seems the dollar correction is finally underway, with the US dollar index suffering its worst single day in one year. Specifically, it’s -1.5% loss on Wednesday was its worst since November 11^th 2022 when the US also delivered a softer-than-expected US inflation report. Inflation is a lot lower than it was last year, but once again it has removed immediate concerns that the Fed will hike again soon, if at all. As they say, history doesn’t repeat but it can rhyme.

USD index technical analysis (weekly chart)

The weekly chart shows that momentum has accelerated to the downside for the USD index, after forming a double top at 107. The second ‘top’ was the bearish engulfing candle I flagged last week, ahead of the move to the 104 target met yesterday.

However, it has met support around the 104 handle with the 38.2% Fibonacci ratio and 50-week EMA. I wouldn’t be too surprised to see some noise around current levels given the significance of 104, but the bigger question is whether that we’re closer to the end of a retracement lower, or this is simply the first phase of an ABC correction.

If the prior two legs lower are anything to go by, there could be further weakness ahead in the coming weeks. If history is to rhyme once more, a -5.1% fall from the 107 highs suggests 102 could be achieved in the coming weeks or months.

USD index technical analysis (daily chart)

A closer look at the daily chart shows the magnitude of the USD’s losses on Wednesday, and that it was the worst day in a year (also following November’s CPI report). And it is interest to note that prices formed an inside day, prattled around for the next few days either side of the inside day, before its trend saw the USD fall a further -5.1% from the November 2022 CPI close price.

Given the price action clues on the weekly chart and acceleration of bearish momentum on the daily, perhaps a move for 102 is not out of the question. But for now, take note of the cluster of support around 104 handle including the 138.2% Fibonacci retracement, 161.8% Fibonacci projection and 200-day EMA.

Gold technical analysis (daily chart)

Gold enjoyed its best day in seven, although when you consider how hard the US dollar fell it seems less impressive. Still, gold has rallied for a second day after finding support around the 200-day MA and 38.2% Fibonacci level. Despite an intraday attempt to break said levels, gold saw three daily closes above them both and has now formed a 3-bar bullish reversal pattern (morning star).

If the US dollar bounces a tad as suspected, it could see gold pull back from current levels. Bulls could therefore consider seeking dips above the cycle lows / 1930 area if prices pull back, with a potential target around the 1985 – 2000 resistance zone. A daily close below 1920 assumes another leg lower for gold and that the US dollar has found some serious buyers again.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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