Gold price at 3-month high after USD tumbles

[MongiIG]

The drop in the US dollar has prompted traders to back dollar-denominated commodities. This has pushed the price of gold to a three-month high. We look at some of the reasons for the move.

 Jeremy Naylor | Writer, London | Publication date: Wednesday 16 November 2022

USD falls

The US dollar fell to a new three-month low yesterday and this pushed up the price of gold.

Two trade ideas

So there are two trades in the market to run around here.

I want to begin, first of all, with a look at the dollar basket, because this is the dollar trading against the whole basket of other major currencies, most of which is the EUR/USD, which we'll see in reverse on this in just a few moment's time.

But this move lower here, you can see quite clearly we're almost at the 200-day moving average. And indeed this line of support here at 10431 now looks in jeopardy.

And if you're short on this, your stock goes above recent price action. It all came as factory gate prices rose 8% yesterday, year-on-year, lower than the 8.3% forecast and the slowest rate of gain since June 2021.

Core PPI was flat month to month, lowest since November 2020. And this data reinforces hopes of a slowdown in the rate at which interest rates are rising from the Federal Reserve (Fed).

Now, as the battle against inflation is not over, some Fed policymakers are now considering raising interest rates at a slower pace. So we've seen 75 basis points recently. The latest central banker to express his opinion was Atlanta Federal Reserve president, Raphael Bostic, who says he sees little evidence that the US central bank's aggressive monetary policy tightening is slowing inflation. He says tighter monetary policy has not yet constrained business activity enough to seriously dent inflation. And he says he anticipates that more rate hikes will be needed.

Bostic, however, did not indicate if he favoured slowing the pace of future rate increases. Now, you may remember on Monday, the Fed vice chair, Lael Brainard, echoed comments by the Fed governor, Christopher Waller, that interest rates need to keep rising to battle inflation or potentially at a slower rate. So she's going for potentially less than the 75 basis points we saw at the last meeting, last four meetings. We've got one more meeting until the end of the year.

Now, how do you trade this? Well, the big trade around this is definitely going to be EUR/USD, which is the inverse pretty much of that dollar basket trade.

Let's take a look at what's been happening because yesterday, significantly intraday, we climbed past this red line here, which is the 200-day moving average.

Now, we haven't really risen above that since April 2021. We had the last major trade back in mid-June. So with something like that's 2021. So it's something around 17-month performance here with this rise above the red line, which is significant for the first rise in 17 months. But it did pull back. We're up again today at 10389.

If you are long on EUR/USD, your stock goes below the 102 level to give you some sort of protection. But I think the big trade out of this is definitely going to be what's going on with spot gold. We're down today, but yesterday we saw the highest print in gold since the 15th of August with that pullback in the dollar that pushed up dollar price commodities, including gold, currently trading at 1776.