Gold price reversing after dollar-driven rally into key resistance

Gold enjoyed a great start to June, with the precious metal rallying sharply from trendline resistance after three months of downside. The break through $1303 provided a bullish breakout signal yet questions are being asked this week which could signal the beginning of a period of weakness. Much of the upside seen last week was attributed to the breakdown in relations between the US and Mexico, coupled with a shift in rate expectations off the back of weaker US jobs data. One of those issues has been resolved over the weekend, with the US and Mexico coming to an agreement that will see tariffs avoided in exchange for a host of measures to stem the flow of immigrants from Mexico. On the other topic, there has been a notable shift in rate expectations, with markets now pricing in two rate hikes in the next three meetings.

Dollar key to gold future

Dollar weakness typically goes hand in hand with gold strength, and the decline in the dollar index highlights one of the main reasons why we have seen this recent rally. It also provides another picture of a potential wider bullish picture for gold. The weekly dollar index is trading within a rising wedge formation, which if broken would likely spark a sharp deterioration for the dollar. In turn that would be expected to send gold higher.

The daily chart highlights the recent respect on trendline support at the bottom of that rising wedge pattern. Coupled with the 200-day simple moving average (SMA), this area of support has managed to put a stop to the recent declines. The ability to remain above that level of support is going to be the key for the trajectory of both the dollar and gold. The big question is whether markets have overshot expectations when it comes to the Federal Reserve (Fed) outlook. Today's US consumer price index (CPI) data release will certainly provide a key element in that story.

Shifting back onto gold, we can see the importance of last week’s high. That $1347 level represents the key swing high from mid-February, and it was the first level of resistance in a zone of major peaks seen throughout the past three years. A break through that $1347-$1375 region of resistance would spark a wider bullish picture for gold, with the dollar index wedge breakdown likely required for such a move to happen.

Where to now for gold?

Looking at the daily gold chart, we can see the start of a breakdown for the market. The stochastic is breaking back below the 80 level, following on from a period of overbought conditions that have been in place since the start of June. The previous three occasions that such a sub-80 breakdown has occurred produced substantial downside for gold. With that in mind, there is good reason that we could see a deeper pullback come into play over the coming days. Given the trendline support currently being respected on the dollar index, further upside for the dollar should help provide us with such a move lower in gold.

Finally, a look at the intraday picture highlights a potential shorting possibility, with the hourly gold chart showing a rebound in place so far today. The respect of the support level from 4 June has brought about a deep rebound of the recent sell-off from $1330. That $1330 level incorporates not only the recent swing high, but also the swing low which was broken on Friday. A break through $1330 would signal a potential weakening of this bearish story, yet for now this looks like a possible turning point for gold.