Gold Price Talking Points

The price of gold holds near the yearly-high ($1510) as the People’s Bank of China (PBoC) continues to weaken the Yuan reference rate, but the precious metal may face a larger pullback over the coming days as the Relative Strength Index (RSI) appears to be on the cusp of flashing a textbook sell signal.

Gold Prices Vulnerable to Larger Pullback on RSI Sell Signal

Gold prices appear to be stuck in a narrow range even though US President Donald Trump tweets “China wants to make a deal” as the ongoing trade dispute instills a weakening outlook for global growth.

As a result, the Federal Reserve may continue to change its tune in 2019 as “incoming information on global growth, trade policy uncertainty, and muted inflation have led the Committee to gradually lower its assessments of the path of policy interest rate.”

The comments suggest the Federal Open Market Committee (FOMC) will alter the forward guidance at the next interest rate decision on September 18 as the central bank updates the Summary of Economic Projections (SEP), and a growing number of Fed officials may forecast a lower trajectory for the benchmark interest rate as St. Louis Fed President James Bullard, a 2019-voting member on the FOMC, insists that “additional policy action may be desirable.”

It remains to be seen if the FOMC will deliver back-to-back rate cuts as “the Committee still sees a favorable baseline outlook,” but Fed Fund futures continue to reflect a 100% probability for at least a 25bp reduction in September, with the central bank likely to come under increased pressure to reverse the four rate hikes from 2018 especially as President Trump favors “a lengthy and aggressive rate-cutting cycle.”

With that said, the risk of a policy error may push market participants to hedge against fiat currencies, and the growing threat of a US-China trade war is likely to keepgold prices afloat as there appears to be a flight to safety.

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Gold Price Daily Chart

Keep in mind, the broader outlook for gold prices remain constructive as both price and the Relative Strength Index (RSI) clear the bearish trends from earlier this year.

Moreover, gold has broken out of a near-term holding pattern following the failed attempt to c lose below the $1402 (78.6% expansion) region , with the RSI still tracking the bullish formation from April.

However, gold snaps the recent series of higher highs and lows amid the lack of momentum to break/close above the Fibonacci overlap around $1509 (61.8% retracement) to $1517 (78.6% expansion).

In turn, gold prices may stage a larger pullback especially as the RSI falls back from overbought territory, with the oscillator at risk of flashing a textbook sell signal once the indicator slips below 70.

Need a break/close below $1488 (61.8% expansion) to open up the $1467 (50% expansion) hurdle, with the next area of interest coming in around $1457 (100% expansion) .

Will keep a close eye on the former-resistance zone around $1444 (161.8% expansion) to $1448 (382.% retracement) for support.

For more in-depth analysis, check out the 3Q 2019 Forecast for Gold

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.