The euro is strengthening against the dollar, expectations are that a weaker US dollar should support gold. Will it and for how long?
The last time I wrote about gold in January, I pointed out the potential for a weakening US dollar, which in turn should be supportive of gold according to conventional market theory. Gold has certainly risen in value since then, and the US dollar has definitely weakened, so with the seasonally controversial March-April time-line approaching, now is a good time to review future possibilities.
Based on the charts below, on a monthly basis the US dollar appears weak, and midway into a correction on the weekly chart, (having lost the trend line but still trading over the moving average). As you can see on a weekly basis, in April-May last year, the dollar was also weak, and in early 2016 the RSI (the top of the chart), was significantly lower. I've drawn green horizontal support, and an indication of a possible yellow zig zag regression/correction path.
Short term, the daily candlestick is bullish, so the market could rise, before it falls, and if the market is really still falling, a bounce up could end near the 50 moving average, which is close to near term possible weakness in a falling trend from early January. Although the RSI is turning up, the black ADX (highlighted yellow), is showing no sign of even flattening out on the MACD which is bearish.
Weekly and monthly chart sources : astrocycle.net
Up until 15th March, the retail crowd was net-short EUR/USD, net-long USD/JPY, and net-long GBP/USD - a mix pointing to a modest US dollar weakness, (source: dailyfx.com). Yet on 15th March, the rate increase was baked in with a 100% likelihood. Influence seems to have arisen from the Euro.
Two further rate increased are already being baked in for 2017, with a 60% likelihood already expected for both June and December, and with some short term euro strength expected, that could tip the balance for US dollar gold too.
On the monthly chart I've drawn the wave relationships in pink, along with the fractal of the current position (yellow). April is looking like a generally weak month for the dollar.
The euro-dollar chart below explains why, with the euro strengthening. I've increased the depth of the first resistance level which as the first dotted line, seems too low on the original. What appears to be wave 3 (rising) is still developing.
So what does this mean for gold? The charts below are US dollar gold and the HUI. The HUI has turned up on the RSI, and fast stochastic based on the move up so far on the oscillators. The HUI could continue up to an overbought level, but could also find selling resistance earlier, near the 50 moving average as happened previously. Some strength is possible while the dollar is weaker.
Bearing in mind that there's over a 50% chance of an interest rate rise in both June and December, gold isn't expected to be all that well 'fundamentally' supported. How can a weaker US dollar force a near term correction in the general stock market?, US interest rates are still less than 1%.
The gold chart below is becoming overbought, both on the RSI and fast stochastic, although the recent correction was a reaction to the RSI level rather than stochastic.
The euro is going through a counter-rally against the US dollar, which is likely to lessen the interest in euro-gold investment, and therefore the strength in the value of dollar gold, even while the USD is generally weaker in April.
Technically, The 200MA level on the gold chart looks like a susceptible area for a correction, while $1304 has to be taken out for a bullish advance. The green rising trend line provides support for an advance, while a failure there suggests the possibility of a larger correction still being underway from the July 2016 high, which could test the December 2015 low. Bearing in mind the +50% chance of an internet rise being baked in for June, traders should allow for the possibility of the December 2015 low breaking, and position accordingly in terms of risk management.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.