Gold price unravels as the DXY index makes a comeback

Gold price has been punched in the face after it had a spectacular start of the year. It initially surged by more than 21% from its lowest point in September to the year-to-date high. The XAU/USD price was trading at 1,835, which was about 6.20% below its highest point this year. 

DXY index comeback

The main reason why gold prices surged earlier this year was the broad view among traders that the Federal Reserve will pivot. This view was supported by the fact that US inflation was moving downward. 

As a result, gold and other risky assets like the Nasdaq 100 index surged as several Fed officials supported the broad market view. On the other side of the spectrum, the US dollar index crashed from last year’s high of $115 to almost $100.

Gold has now retreated because of the general view that the market got ahead of what was really happening. This view is supported by strong America’s inflation numbers that were published last week. These numbers revealed that inflation remains stubbornly above 6%. 

During the same period, the labor market is too hot despite the mass layoffs by leading companies like Microsoft and Alphabet. As such, expectations are that the Fed will continue hiking rates for longer than expected. Analysts at Goldman Sachs expect three more hikes until June this year. Their report said:

“In light of the stronger growth and firmer inflation news, we are adding a 25bp (basis points) rate hike in June to our Fed forecast, for a peak funds rate of 5.25%-5.5%.”

The same view is supported by analysts at Bank of America and Citigroup. In a statement, an analyst at Citigroup said that the Fed will need to hike above 5% soon. Therefore, gold price is reacting to the triple whammy of slow American growth, higher inflation, and a stronger-than-expected US dollar.

Gold price forecast

Gold chart by TradingView

A look at the gold price daily chart shows that the current meltdown happened when the metal rose to $1,958. Looking back, this was an important level since it was the highest level in November 2020 and January 2021. As such, the crash did not happen by accident. It has now flipped the support at $1,877 into a resistance. 

At the same time, gold has moved below the 50-day moving average. Therefore, I suspect that the XAU/USD will have some more pain in the coming days. If this happens, the next level to watch will be at $1,750.

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