Metals Rebounding, Helped by Weaker USD

The metals market has started the week on the front foot, benefitting from the developing correction in USD. The Dollar has been net-sold since the middle of last week and is seeing further selling again today. One of the key drivers behind the downshift in USD has been the increased hawkishness we’ve seen from the ECB. The central bank announced its largest rate hike in over 50 years last week, lifting its headline rate by 75bps to 1.25%. With European rates having shifted sharply this year out of negative territory and with further rate hikes signalled, the eroding divergence between the ECB and the Fed is hurting USD flows here.

Looking ahead this week, metals traders (as with the rest of the market) will be watching tomorrow’s US CPI print closely. If we see inflation moderating again on the back of the drop in July, this no doubt push USD down further as traders anticipate room for a less-hawkish tone from the Fed at the upcoming September FOMC meeting. In this scenario, a weaker USD will allow metals prices to recover further. On the other hand, if the data is seen coming in above forecasts (confirming a fresh jump in CPI) this will likely re-sharpen the market’s hawkish Fed expectations, driving USD higher near-term and dragging metals lower.

Technical Views

Gold

Gold prices are at an interesting juncture here. The broad sell off this year, outlined by the bear channel, has stalled along support at the 1679.77 level. With price currently holding here and momentum studies showing plenty of bullish divergence, there is room for a double bottom to play out, suggesting higher prices in the near-term. The key levels for bulls to break will be the 1722.37 level (currently testing) and 1791.63 above.

Silver

The reversal higher in silver over the last week has seen the market breaking back above the 18.4421 lows. Price is now fast approaching a test of the bearish trend line from YTD highs, along with structural resistance at the 19.5643 level. With MACD and RSI both bullish, the focus is on a break higher here and a continuation towards the 20.6389 level next.