Gold regains $2,500 as dollar recovers

• Gold prices are recovering as the US dollar recovers from year-to-date lows.
• Mixed US economic data is making the market cautious about whether the Fed will cut rates by 0.50% in September.
• Heavy long positioning in gold is another big hurdle for the bulls trying to push the price higher.

Gold (XAU/USD) is trading at around $2,500 after falling on Wednesday as the US dollar (USD) surged. Since gold is primarily priced in USD, any strength in the greenback weighs on its price. The US dollar index (DXY) rose by about half a percent to a little over 101.00 on Wednesday, bouncing off the 100.51 year-to-date low touched the previous day.

US data was mixed on Tuesday, with the Conference Board's gauge of consumer confidence rising to 103.3 in August and beating expectations of 100.7. The optimism coming from the US consumer provided further evidence against a tough scenario for the US economy. However, according to Deutsche Bank strategist Jim Reid, labor market indicators “fell to the weakest levels so far this cycle, which supported concerns about a recent slowdown in the labor market.”

Gold prices fall as concerns over US economy ease

Gold is moving lower on Wednesday as data over the past few days paint a mixed picture of the state of the US economy. The Richmond Fed Manufacturing Index fell to -19 in August, compared to an earlier forecast of -17, while it improved to -14. Meanwhile, US housing data remained mixed, with home prices declining 0.1% monthly in June against expectations of a 0.2% increase, but the S&P/Case-Shiller House Price Index showed a 6.5% year-on-year increase against estimates of 6.0%.

The data comes after better-than-expected US durable goods orders data on Monday showed a sharp rise of 9.9% in July – the highest figure since May 2020, and helped reassure investors about the US economy.

Despite these releases, market expectations for the trajectory of US interest rates appear to have changed little. According to the CME FedWatch tool, the probability of the Fed making a major interest rate cut by 0.50% in September remains in the mid-30s. This is around the time when Federal Reserve (Fed) Chair Jerome Powell gave a clear indication in his speech at Jackson Hole that a cut was in the pipeline. That being said, 3-month US Treasury yields are rising on Wednesday while longer-term maturity bond yields are moving lower, which could indicate that bond traders do not trust the Fed to make a major rate cut by 0.50%. Such a move, if it happens, would benefit gold, a non-interest paying asset that sees gains as interest rates fall.

Now traders eye the Fed's preferred measure of inflation, the personal consumption expenditures (PCE) price index, which will be released on Friday, for a clearer idea of ​​where the Fed might go on interest rates. A second estimate of U.S. gross domestic product (GDP) data for the second quarter on Thursday could influence expectations, while a slim docket on Wednesday offers only comment from Atlanta Fed President Raphael Bostic. Nvidia (NVDA) earnings will be released after hours.

According to Daniel Ghali, senior commodity strategist at TD Securities, excessive long positions remain a problem for bulls trying to push up the price of gold.

“Our gauge of macro fund positioning in gold is now at the highest levels recorded in the depths of the pandemic. This red flag reflects local highs set in September 2019, and previously in July 2016,” says Ghali.

“The risk of harm is even greater now. The ship is crowded. In fact, it has never been as crowded as it is today. Have you secured a place on the lifeboat?” the strategist adds.

Technical analysis: Gold falls again after retesting the high of $2,530

Gold (XAU/USD) is falling back after retesting the $2,530 level. Overall, it remains within a consolidation above its old range. Despite the recent pause, gold remains in a short-term uptrend, which favors longs over shorts according to “the trend is your friend.”

XAU/USD 4-hour chart

The breakout of the range (which resembles an incomplete triangle pattern), occurred on August 14 and generated an upside target at around $2,550. This was calculated by taking the 0.618 Fibonacci ratio of the height of the range and extrapolating it higher. This target is the minimum expectation for follow-through after a breakout based on the principles of technical analysis.

A close above the August 20 all-time high of $2,531 would confirm a continued rise toward the $2,550 target.

Alternatively, a move back inside the range could negate the projected upside target. Such a move would be confirmed by a daily close below $2,470 (August 22 low). This would change the picture for gold and put the short-term uptrend in doubt.

However, gold is broadly bullish over the medium and long term, supporting the overall bullish outlook for the precious metal.