Gold forecast: Upside potential in focus as USD mulls a pullback

Traders were received to hear that Jerome Powell had slammed the door shut of further hikes, and that saw the US dollar hand back pre-emptively hawkish gains alongside lower yields, helping gold prices to climb back above $2300.

What traders would love to see now is a softer set of NFP figures in Friday's report. But not too soft, as that could signal that the Fed have finally broken something and prompt a knee-jerk reaction from investors to move to cash weigh on risk and gold in tandem. 

In all likelihood, the US dollar index has entered a correction after rallying around 6% from the December low. That should throw a level of support under gold prices, although I remain hesitant to expect it to simple break to new highs from here. 

We're fast approaching the second half of the year, and in all the time central banks continue to pile into physical gold, I suspect gold can hold above $2000 for the remainder of the year and break above $2500.

Gold futures market positioning, from the COT report:

It should come as no surprise that traders remain net-long gold futures given the rise in prices this year. Although it is worth noting that net-long exposure has plateaued near familiar resistance levels for both large speculators and asset managers. Yet bullish exposure is not at extreme levels by historical standards, making it debatable as to whether we should be concerned about a sentiment extreme.

The weekly chart shows a falling wedge / pennant which assumes an eventual bullish breakout in the coming weeks or months. Yet it is not yet clear as to whether we have seen the final low on this assumed bullish continuation pattern. My gut feel is that we have not, which means we could see some choppy trade on the daily timeframe before the bullish trend resumes. But the prospects of lower US yields and a pullback on the US dollar should at least support it over the near-term.

Gold technical analysis:

Prices fell beneath the April 29 low, 50% retracement level and weekly S1 pivot ahead of the Fed meeting, yet quickly rebounded back them afterwards. A false break of a swing low always grabs my attention, and this paints a near-term upside bias.

A bullish engulfing candle also formed with a break above $2300 to show strong demand around this key level, which was accompanied with high volume to show bullish conviction in the move higher. Yet with RSI (2) having reached oversold, I am now looking for a pullback towards $2310 to reconsider a bullish setup with $2040 - $2050 in view for a potential bullish target. A break above $2055 likely requires a deeper retracement in the US dollar, but for now I am not convinced the dollar will simply roll over. We can reassess that potential if gold reaches the $2040-$2050 zone.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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