24.05.201802:25 Forex Analysis & Reviews: Fed will ignite gold for green light

Contrary to the US dollar not getting tired of gaining momentum, gold managed to push off from the five-month bottom against the backdrop of growing demand for safe haven assets. According to US Treasury Secretary Steve Mnuchin, Washington's intention to put a trade war with China on a pause, the temporary cancellation of import duties of $ 150 billion, and the desire of China to expand purchases of US agricultural products including oil and natural gas did not mislead investors. In fact, the States can resume the policy of pressure on Beijing after the meeting of Donald Trump with the leader of North Korea. While China needs the US as a strategic partner, the Americans have the option to not touch it. However, in the middle of June, everything will probably return to normal.

It was rather curious to observe the multidirectional dynamics of the USD index and the yield of US Treasury bonds. Rally rates of the US debt market faithfully served the dollar for the past five weeks. However, on the eve of the publication of the minutes of the last FOMC meeting, the situation has changed. First, the "Greenback" found a new driver of growth. We are talking about the weakness of its main rival, the euro. The composite index of business activity in the euro area slowed from 55.1 to 54.1, disappointing the experts of Bloomberg. The indicator is losing speed for the fourth consecutive month and fell to the lowest level since November 2016. As a result, the economic recovery of the currency block, which the ECB does not tire of talking about, is under big questions. Coupled with the growth of Italian political risks, this circumstance puts serious pressure on the euro, whose share in the USD index is 57%.

Dynamics of business activity and GDP of the eurozone

At the same time, the uncertainty in US relations with North Korea, China, and Iran, the increased risks of a slowdown in the world economy due to the euro area and the Middle Kingdom, and the expectations of the publication of the minutes of the May FOMC meeting have increased the demand for safe haven assets. As a result, the yield of treasury bonds went toward a two-week low, depriving the dollar of an important driver of growth. The synchronous dynamics of the rates of the US debt market and the USD index made gold a whipping boy. However, it was worth it for friends to go on different roads. The precious metal gave signs of life.

Investors recalled that the mention of the symmetric nature of the movement of inflation in the accompanying statement of the Federal Reserve dealt a blow to the US currency. They said that the Central Bank is ready to tolerate exceeding the target and will not aggressively raise the rate. Currently, the base PCE has reached the level of the March forecast of FOMC and consumer prices have completely accelerated to 2.5%.

Dynamics of US inflation and federal funds rates

In our opinion, if the protocol does not frighten the "bears" of the dollar, then some of their opponents may start to record profit on longs at the USD index. This, in turn, will lead to an increase in the price of gold.

Technically, the "Expanding Wedge" and "Shark" patterns continue to work. To return to the game, "bulls" need to storm the resistance level at $ 1301-1303 per ounce. Failure to do this will allow the "bears" to return the initiative to their own hands.

Gold, daily chart