U.S. Dollar’s Plunge Changes Gold Trend to Up

Forex NewsAugust Gold surged through the last swing top at $1267.00, changing the main trend to up on the daily chart for the first time since late December 2012. The upside momentum generated by the move triggered a rally into a key retracement zone at $1286.90 to $1312.27.

Fundamentally, the move was fueled by the soft Fed minutes and dovish remarks by Fed Chairman Ben Bernanke. The Fed minutes revealed that its members were concerned about the impact that tapering its asset-buying program would have on the markets and worries about the growth in the jobs market. Bernanke said, “Highly accommodative monetary policy for the foreseeable future is what’s needed in the U.S. economy.”

Both the Fed minutes and Bernanke’s comments were perceived as dovish, leading to a softening of interest rates and sending the U.S. Dollar sharply lower. A cheaper Greenback made gold priced in dollars cheaper for foreign investors.

Despite the weaker U.S. Dollar, September crude oil is forming a closing price reversal top. This is usually indicative of the lack of buying interest at current price levels. The recent surge in prices has put the market into overbought territory so today’s weakness is not a complete surprise. The fact that the dollar is rebounding after gapping lower on the opening may be exerting pressure on prices. If the dollar turns positive, crude oil could break even further on an intraday basis and possibly finish the day lower.

Tension in Egypt continues to be the main story driving prices higher. Today’s weakness may be just a technical pause caused by overbought conditions. The strong fundamentals and the size of the speculative open interest is likely to keep the market underpinned and could encourage fresh buying following a near-term correction.

After an early session surge which was actually a follow-through move following yesterday’s sharp rally, the EUR/USD back down below 50% of the day’s range. Today’s renewed selling pressure is a strong indication that the two-day rally may have been overdone.

Fundamentally, the longer-term outlook still supports a weaker Euro versus the dollar. This is because the European Central Bank is poised to keep interest rates low while the U.S. Fed is likely to make a move before the end of the year to begin tapering its monetary stimulus program. This should help maintain the firm tone in the dollar. Traders with a longer-term view of the markets are likely to treat any rally as a new shorting opportunity since the main trend is down and expected to move lower over the long-run unless the U.S. economy begins to weaken.

The GBP/USD spiked higher overnight but managed to give back more than 50% of its earlier gains. Once again, the decision by the Bank of England to keep U.K. interest rates at historically low levels indefinitely is the main reason to believe the British Pound will remain weak against the U.S. Dollar.

Today’s move merely reflects oversold conditions and a knee-jerk reaction to the Fed’s dovish minutes and Bernanke’s dovish commentary on Wednesday. Since the main trend is down on the daily chart, look for bearish traders to implement another round of shorting pressure following a test of 1.5281.