Gold Price Action Remains Bearish Despite Recent Bounce

Summary:

Gold price trades with a heavy tone ahead of the Fed's testimony later in the trading week. The US CPI might also influence the price action.

Gold price has bounced from $1,760 recently but found resistance at $1,800. Ahead of the Fed’s semiannual testimony this week, gold looks vulnerable as the US dollar’s strength may return with a vengeance.

The main event of the trading week for financial markets is Fed Chair Powell’s testimony on Wednesday and Thursday. The market is looking for any clues that the Fed might give regarding its asset-purchasing program, and any hint at tapering will likely have a major impact on the US dollar.

Until then, another important release may impact the commodity market even tomorrow. The US CPI or inflation is scheduled to be released, and changes in inflation may lead to a sudden move in the price of gold.

Gold is also known for having an inverse correlation with the US 10-year yields. An eventual rise in yields triggered by a more hawkish Fed will weigh on gold, especially if the US dollar gains ground against its peers.

Fed gave a hawkish statement at its June meeting, and the markets were taken by surprise. It is either at this week’s testimony or August’s Jackson Hole Symposium when the tapering of the asset purchases is announced. Therefore, the more clarity the markets get, the easier for the Fed to avoid a taper tantrum.

Gold Price Technical Analysis

The daily chart shows a head and shoulders pattern with the highest point above $1,900 and a potential neckline at $1,760. A close below $1,760 spells trouble for gold bulls, as investors will sell for the measured move.

Bears, therefore, may want to wait for the price of gold to close below $1,760 before going short. The invalidation or stop for the short trade should be at the highest point of the last lower high, while the take profit level may be set by using a risk-reward ratio bigger than 1:2 or even 1:3.