Source: PaxForex Premium Analytics Portal, Fundamental Insight
After gold launched a massive six-week rally, price action was ripe for a necessary correction. Geopolitical events coupled with inflationary readings not seen in 40 years provided fuel for bulls to drive the XAU/USD higher. Investors have sought safe-haven assets since the beginning of 2022, driven by a sell-off in global financial markets and monetary policy changes by central banks. The US became the primary exported of inflation, as the US Dollar is the primary commodity quote currency. Therefore, the unofficial weak US-Dollar policy, which helps US exporters and the US government keep interest rate payments on its record debt lower, resulted in unnecessary price increases for global consumers.
Signs of prolonged global issues became evident as the US Dollar rose with gold prices. While they often enjoy an inverse relationship, when gold rallies despite a stronger US Dollar, it is a sign of structural and longer-term issues in the global financial system. The US Federal Reserve misread inflation during the height of the Covid-19 pandemic, continuing its policy missteps as it constantly remains behind the curve, and labeled inflationary pressures as transitory.
US Federal Reserve Chief Powell noted that inflation is too high and that the central bank will take necessary actions. It raised interest rates by just 25 basis points and communicated interest rate hikes for each subsequent meeting in 2022. Balance sheet reductions are likely to follow and add selling pressure on US markets. Inflation will eventually recede but likely remain a threat to consumers longer than financial markets and central banks plan. The global economy could slow in 2022, with inflation rampaging consumer spending power while central banks play catch-up. It presents ideal conditions for stagflation, the worst outcome for any economy, and keeps upside pressure on gold prices throughout the year. Buying dips in the XAU/USD can offer investors a smart hedge for their portfolios.
The forecast for the XAU/USD started to turn bullish following a much-needed correction. Price action stabilized, and the flat Kijun-sen confirms fading short-term bearishness. The Tenkan-sen resumes its downtrend and has crossed below the Kijun-sen, suggesting volatility can increase while bulls and bears wrestle for control over the next move. While the Ichimoku Kinko Hyo Cloud shows signs of a temporary sideways trend, it remains overall bullish and favors more upside. Traders should also monitor the CCI after it collapsed from extreme overbought territory. It formed a higher low, and a move above zero can initiate a price action reversal. Will bulls regain the upper hand and pressure the XAU/USD into its horizontal resistance area? Subscribe to the PaxForex Daily Fundamental Analysis and earn over 5,000 pips per month.
Should price action for XAU/USD remain inside the or breakout above the 1,917.90 to 1,952.90 zone, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Long Position
- Entry Level: Long Position @ 1,935.75
- Take Profit Zone: 2,050.00 – 2,070.00
- Stop Loss Level: 1,895.00
Should price action for XAU/USD breakdown below 1,917.90, PaxForex recommends the following trade set-up:
- Timeframe: D1
- Recommendation: Short Position
- Entry Level: Short Position @ 1,895.00
- Take Profit Zone: 1,815.00 – 1,829.65
- Stop Loss Level: 1,917.90
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