Gold has behaved more like a commodity than a safe haven or inflation hedge over the past few weeks, and the trend remains intact. Overall market sentiment remains the dollar against riskier assets like commodities and stocks.
The U.S. dollar index has been rising since the start of the year, but the pace of gains has accelerated since the start of the month as growth concerns and Fed tightening expectations pushed investors toward the greenback.
While the greenback has not moved significantly, the greenback is struggling to build momentum in the absence of fresh triggers, making it vulnerable to profit-taking.
The dollar index fell 1.2% last week, its first decline in four weeks, and has corrected more than 2% from its 2002 highs set earlier this month. Based on weekly RSI readings, the US dollar index has been in overbought territory for quite some time, which could leave it vulnerable to a correction.
The dollar lost momentum amid disappointing U.S. economic data and other central banks tightening monetary policy.
U.S. economic data was mixed, but some disappointing data last week underscored the buildup of economic stress. U.S. weekly jobless claims rose to their highest level in eight months. The Philadelphia Fed’s July factory activity index contracted for the second straight month in July. Leading indicators fell for a fourth straight month, fueling debate over a recession. Meanwhile, the services PMI fell below 50, signaling a contraction in the sector.
The U.S. economic outlook has deteriorated as the U.S. central bank begins aggressively tightening monetary policy to control inflation. Market participants expected the Fed to take a more cautious approach amid the lacklustre economic data.
The dollar’s gains over the past few months have also been driven by expectations that the Federal Reserve may lead other central banks to tighten monetary policy.The dollar also lost momentum last week as the European Central Bank joined other central banks to tighten monetary policy
The ECB raised interest rates for the first time since 2011 and decided to hike lending rates by 0.5% outright, surprising the few who had expected a more gradual approach. The European Central Bank has started a rate hike cycle to control inflation, but uncertainty remains about the pace of future rate hikes.
The yen also managed to gain against the dollar last week, even as the Bank of Japan kept monetary policy unchanged as expected and reiterated its support for easy monetary policy. However, the Bank of Japan raised its inflation forecast, signalling a cautious stance on rising price pressures.
The movement of the dollar has been a key factor, not only for gold, but for commodities as a whole, raising interest rates or contemplating a larger and unprecedented 1% rate hike to keep inflation in check. The Fed is widely expected to continue raising rates at the current rate of 0.75%. If the Fed meets market expectations, it could be seen as a sign that the central bank may refrain from taking aggressive steps to support the economy. The recent correction in the U.S. dollar suggests we are already headed in this direction, but if the Fed shows any signs of slowing, we could see the U.S. dollar fall further, which could support commodities.
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