2012 High Back on Radar, RSI Eyes Overbought Zone

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Gold Price Talking Points

The price of gold holds near the monthly high ($1779) as the Federal Reserve’s balance sheet contracts for the second consecutive week, but the reversal from the May low ($1670) brings the 2012 high ($1796) back on the radar as the Relative Strength Index (RSI) approaches overbought territory.

Gold Price Forecast: 2012 High Back on Radar, RSI Eyes Overbought Zone

The price of gold continues to trade to fresh yearly highs during every single month so far in 2020, and the bullish behavior may persist despite the limited reaction to US data prints as the Federal Reserve Chairman Jerome Powell vows to “increase our holdings of Treasury securities and agency mortgage-backed securities over coming months at least at the current pace.”

Image of Federal Reserve balance sheet

In turn, the contraction in the Fed’s balance sheet may end up being short lived as the reduction is largely driven by a decline in liquidity swaps, and current market conditions may keep gold prices afloat as the central bank favors asset purchases over other non-standard measures like a yield curve control program.

As a result, the Federal Open Market Committee (FOMC) may continue to utilize its balance sheet in the second half of the year as Chairman Powell rules out a negative interest rate policy (NIRP), and it seems as though Fed officials are in no rush to deploy more non-standard tools as the update to the Summary of Economic Projections (SEP) show “a general expectation of an economic recovery beginning in the second half of this year.”

With that said, the FOMC may stick to the same script and reiterate its pledge “evaluate our monetary policy stance and communications” at the next interest rate decision on July 29, and the central bank may call on US lawmakers to further support the economy as Kansas City Fed President Esther George warns that “there is a risk that the impetus from fiscal policy will turn negative before the recovery has been fully realized.

George goes onto say that “it might be awhile before the dust settles and we gain insight on whether further accommodation is necessary or not,” and the comments suggest the FOMC will carry out a wait-and-see approach over the coming months as the Kanas City Fed President insists that “Federal Reserve actions appear successful.”

It remains to be seen if Chairman Powell and Co. will alter the forward guidance in the second half of 2020 as “the improvement in financial conditions should further support a rebound in economic activity,” but the low interest rate environment along with the ballooning central bank balance sheets may continue to act as a backstop for the price of goldas marketparticipants look for an alternative to fiat-currencies.

Gold Forecast

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Gold Price Daily Chart

Image of gold price daily chart

Source: Trading View

  • The opening range for 2020 instilled a constructive outlook for the price of gold as the precious metal cleared the 2019 high ($1557), with the Relative Strength Index (RSI) pushing into overbought territory during the same period.
  • A similar scenario materialized in February, with the price of gold marking the monthly low ($1548) during the first full week, while the RSI broke out of the bearish formation from earlier this year to push back into overbought territory.
  • However, the monthly opening range for March as less relevant amid the pickup in volatility, with the decline from the monthly high ($1704) leading to a break of the January low ($1517).
  • Nevertheless, the reaction to the former-resistance zone around $1450 (38.2% retracement) to $1452 (100% expansion) instilled a constructive outlook for bullion especially as the RSI reversed course ahead of oversold territory and broke out of the bearish formation from February.
  • In turn, gold cleared the March high ($1704) to tag a new yearly high ($1748) in April, with the bullish behavior also taking shape in May as the precious metal traded to a fresh 2020 high ($1765).
  • The bullish behavior persists in June as the reversal from the May low ($1670) produces a break of the monthly opening range and pushes the price of bullion to a fresh 2020 high ($1779).
  • Failure to extend the series of higher highs and lows from earlier this week may generate range bound conditions ahead of July, but a break/close above the $1786 (38.2% expansion) region may spur a run at the 2012 high ($1796) as the RSI clears the negative slope from the previous month and approaches overbought territory, with a move above 70 likely to be accompanied by higher gold price as the bullish momentum gathers pace.
  • Next area of interest comes in around $1803, the November 2011 high, followed by the $1822 (50% expansion) region.

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— Written by David Song, Currency Strategist

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