31.05.201801:38 Forex Analysis & Reviews: Gold as an anti-dollar

Gold shows mixed dynamics amid the interaction of many "bullish" factors with a strong US dollar. The fastest decline in the yield of 10-year Treasury bonds since mid-2016, the fall in the likelihood of four federal funds rate hikes in 2018 from more than 50% to 23%, a correction in the US stock market and a strong demand for safe haven assets would seem to have pulled the "bulls" for XAU/USD out of the abyss. In actual fact, it turns out that the function of the precious metal as an anti-dollar is more important than all the other drivers of its growth.

The political crisis in Italy, where President Mattarella put a stick in the wheels of eurosceptics in the formation of the government, brought the EUR/USD down to its lowest level in the last 10 months, which had a favorable effect on the positions of the fans of the USD index. Potentially caused by the flight of capital from the financial markets of the country, the growth of the yield of local bonds will slow down the GDP due to an increase in the cost of credit. Rally rates in Italy are contagious. It leads to similar processes in other eurozone countries and increases the risks of maintaining the ultra-soft monetary policy of the ECB.

At the same time, the eurozone is experiencing problems due to the potential escalation of trade tensions between the United States and China. The US, instead of putting the trade war on pause as it promised, reported the imminent publication of the list of Chinese goods subject to import duties on $50 billion. Oil was poured into the fire by the President of the Philadelphia Federal reserve Patrick Harker, who began to doubt the need to raise the Federal funds rate in 2019. As a result, the Italian policy, the Sino-American trade dispute and the decline in the chances of aggressive monetary tightening of the Fed forced the yield of Treasury bonds to collapse at the fastest pace since the referendum on Britain's membership in the EU. If not for the strong dollar, it would be a serious reason for the attack of bulls on the XAU/USD.

The dynamics of the US dollar, the yield of US bonds and gold

The precious metal, surrounded by a lot of "bullish" factors and a strong negative in the form of a dollar standing firmly on its feet, does not find support from the physical market. Chinese net imports from Hong Kong in April fell to 38.4 tons, which is 35% lower compared to March and is down 48% compared to the same period last year. For the first four months, net deliveries amounted to 182.6 tons (-31% y/y).

In my opinion, all the successes of the USD index are due to the weakness of the euro. Despite the growing likelihood of a repeat parliamentary election in Italy, few people believe that the Republic will leave the eurozone. The gradual improvement of macrostatistics on the currency bloc will contribute to the formation of the consolidation range of 1.15-1.19, which will force investors to pay attention to the "bearish" factors for the dollar and increase the demand for gold.

Technically, the "broadening wedge" pattern continues to be implemented. Rollbacks in the direction of 23.6%, 38.2% and 50% of the 4-5 wave are usually used to form short positions.

Gold, daily chart