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The dollar strengthens sharply on Thursday, and a pullback began in the financial markets. Based on the minutes of the FOMC December meeting released Wednesday evening, the level of interest rates in the United States may be raised in March, and some market participants and economists now believe that the basic interest rate of the Fed may be raised even earlier than previously expected. Now rates can be raised even before the completion of the Fed's quantitative easing program, and this radically changes the concept established in the market and is embedded in the value of the dollar.
If expectations for the positive monthly report of the U.S. Department of Labor are justified on Friday, it will further strengthen the opinion of market participants that we should expect a more aggressive cycle of interest rate hikes in the United States. According to the forecast, 400,000 new jobs were created in the U.S. outside the agricultural sector in December, and the unemployment rate fell to a new minimum of 4.1% since March 2020.
Thus, the increasing divergence of the trajectories of the dynamics of monetary policy tightening in the United States and other countries with the largest economies comes to the fore, creating conditions for the growth of demand for the dollar. Probably, many investors will "get out of their chests" the carry-trade strategy, when a more expensive currency is bought at the expense of a cheaper one. This simple strategy is more suitable for long-term investments that bring a stable investment income.
In part, this is already demonstrated by the USD/JPY pair, which has risen sharply in the past few weeks. The yen can still remind of itself as a reliable protective asset. However, now that concerns about a new slowdown in the global economy due to the omicron strain of the coronavirus have subsided a little, investors are emerging from the protective yen and gold, preferring the dollar. The rising U.S. government bond yields are also helping to strengthen the dollar. In particular, the 10-year U.S. Treasury yields jumped today to a 10-month high of 1.744% in the wake of their sell-off.
As for gold, which is also a popular protective asset, is falling in price today. At the time of writing, the nearest gold futures are trading slightly above $1,794 per ounce.
As you know, gold does not bring investment income, but it is extremely in demand in conditions of uncertainty. However, gold quotes are very sensitive to changes in the monetary policy of the world's central banks, especially the Fed. And now, when investors' confidence that the Fed will start actively raising interest rates (at least 3 times in 2022) is growing, the upward trend of gold may be broken. The price has already broken through an important long-term and psychologically significant support level of $1,800 per ounce. If the decline in XAU/USD continues, the breakdown of the local support level of 1,752 will create prerequisites for a deeper decline.
However, there is still one alarming point. The FOMC minutes released yesterday hardly mentioned the omicron strain of COVID-19. This is already vital in the current situation as cases are now rising in the U.S. The increase in morbidity may lead to the introduction of new restrictions and a new slowdown in the economy, which may also affect the mood of the Fed leaders and their further decisions on monetary policy.
With the aggravation of the situation and increased uncertainty against the background of growing inflation, gold prices may again return above 1,800 with the prospect of retesting the level of 1,832. Subsequent events and news from the front of the fight against coronavirus will probably prompt the need for action in one direction or another regarding the dynamics of XAU/ USD.
Technical Analysis and Trading Recommendations
As noted above, the XAU/USD pair is again testing the breakout of the important support level 1,800 (200 EMA, 144 EMA, 50 EMA on the daily chart and 50 EMA on the weekly chart). This mark has also become psychologically significant since about the beginning of 2021.
A confirmed breakdown of the 1,800 support level could trigger a further decline in XAU/USD. After returning to the zone below 1,785 (local support level), the decline in XAU/USD is likely to continue towards support levels of 1,752 (local lows), 1,725 (lower border of the descending channel on the daily chart), 1,682 (38.2% retracement to the growth wave since December 2015 and the level of 1,050), 1,635 (200 EMA on the weekly chart). A breakdown of the support level 1,560 (50% Fibonacci level) will increase the risks of breaking the long-term bullish trend in XAU/USD.
In an alternative scenario, XAU/USD will resume its growth. However, in order to open new buy deals, it is probably still better to wait for a more confident growth of XAU/USD, for example, above 1,809 and 1,814.
In this scenario, XAU/USD will continue to rise to the local maximum of 1,916 and the upper border of the ascending channel on the weekly chart with intermediate targets at resistance levels 1,832 (local highs and 23.6% Fibonacci level), 1,877 (local resistance level).
Support levels: 1785.00, 1752.00, 1725.00, 1682.00, 1635.00, 1560.00
Resistance levels: 1800.00, 1809.00, 1814.00, 1832.00, 1877.00, 1900.00, 1916.00, 1963.00, 1976.00, 2000.00, 2010.00
Trading recommendations
Sell Stop 1784.00. Stop-Loss 1806.00. Take-Profit 1752.00, 1725.00, 1682.00, 1635.00, 1560.00
Buy Stop 1806.00. Stop-Loss 1784.00. Take-Profit 1809.00, 1814.00, 1832.00, 1877.00, 1900.00, 1916.00, 1963.00, 1976.00, 2000.00, 2010.00
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