The current week was not easy for the markets, but it was very interesting. After the shocking equity sale-off in the previous week (February 5-9), markets were wondering – what is going to be next? Are overbought USA stock indices turning towards medium-term correction or this is only a technical pullback caused by sharp bond yield rise.
What will happen next with USD dollar, while yields curve rising amid expectations of soon Fed rate hike? Many have started talking about the dollar's reversal, and we too were inclined to this scenario, taking into account the oversold USD levels and minimums since 2014. That is why the trading day in the middle of the week - Wednesday, was so important or rather the statistical data on consumer inflation, which were published that day and set the medium-term direction for the currency and equity markets.
Data on US consumer inflation is a very important indicator, the one is primarily taken into account by the American regulator when deciding whether to raise the interest rate (along with GDP data and the labor market data). Markets believe that weak inflation is the only factor that can have a restraining effect on the Fed's plans to raise the rate at least three times in 2018.
On Wednesday, February 14, gold overcame the distance from the support level at $1325 to the annual highs set in January 2018 around $1357 mark after the release of US statistics.
The data showed an increase in inflation pressure but due to cyclical factors (prices for gasoline and food), while the base consumer price index for the month grew by only 0.1% and in annual terms remained at 1.8%, which is certainly below the target level of the Fed at 2%.
In addition, data on US retail sales just disappointed the markets. January retail sales unexpectedly dropped from the previous + 0.4% down to -0.3%. This is a negative factor for medium-term inflation growth as well. After some volatility, markets began to sell USD dollar and buy stock assets. Somewhat strange was in the rise of US yields as USD dollar declined. VIX volatility index finally calmed the markets, declining to minimal levels of the last two weeks and traders organized a massive equity market rally, while DX dollar index fell to the low of 2014 - not far from 88 points.
Lately there have been considerations on the market about possible future problems in the US economy, which may contribute to the further medium-term gold growth. After tax reform implementation, US budget revenues will drop sharply, while expenses are not reduced. Besides Trump administration is interested in a weak dollar, which might lead to a strong increase in inflation and will have some negative impact on the economy. Higher inflation will bring higher interest rates, increasing the demand for gold alongside, the best anti-inflation and safe haven asset so far. The risks of inconsistencies of monetary and fiscal policy are already in the action exerting some pressure on the dollar.
Technically, there are grounds for talking about medium-term growth of the gold and this is visible on the chart. In the last days of the week, the price has come close to the strategic resistance level $1360- $1365. This is the third attempt to storm this level for last two years, while the gold market is in the phase of the bullish trend, starting in January 2016. According to the rules of classical technical analysis, such large-scale strategic levels are passed by the market from the third time. Consolidation above this level will open the way for the growth in the $ 1430.
Good luck in your trading!