Gold Plummets on Inflation Fears

6 July 2022, 01:53

Market Focus

US stock rebounded slightly after falling as much as 2.2% on Tuesday as fears of a globalized recession take their toll on financial markets. The talks of easing tariffs on China imposed by the former administration failed to appease recession fears as inflation remains stubborn despite the fact that reducing tariffs on imported Chinese goods could lower consumer prices in the US. The release of the FOMC minutes in today’s session will provide a detailed viewpoint of Federal Reserve policymakers on supporting the 75 basis points interest rate hike. In the Eurozone, German Economic Minister Robert Habeck noted that the energy industry crisis could have a negative impact on financial markets as Russia has curbed gas flows to the country. Market participants expect the European Central Bank to hike rates by 130 bps by the year end.

The benchmarks, S&P 500 and Nasdaq 100 both rose on Tuesday despite the safe-haven US dollar taking advantage of the risk-off market mood. The S&P 500 was up 0.2% and the Nasdaq 100 also advanced with a 1.7% gain for the day. However, eight out of eleven sectors stayed in negative territory as the energy and utilities sectors were the worst performing among all groups, losing 4.01% and 3.43%, respectively. The Dow Jones Industrial Average meanwhile declined with 0.4% loss on Tuesday while the MSCI World index rose 0.3%. Global equity markets remain under pressure as investors rush to the dollar’s safety.

Main Pairs Movement:

The US dollar advanced and surpassed the 106.00 yardstick to touch a new cycle high on Tuesday. The US dollar soared over 1.3% due to the fears of a globalized recession, continuing to find demand amid the risk-averse scenario. According to analysts, the risk of a US recession is above 70%.

EUR/USD was surrounded by bearish momentum. The EUR/USD pair fell to a 20-year low of 1.0236, recovering some ground later in the day but still hovering below the 1.0300 threshold. Economic reports show that EU growth has slowed down to a 16-month low, while Germany struggles to get gas amid gradually increasing tensions with Russia. German Economy Minister Robert Habeck said that the energy industry crisis could have a negative impact on financial markets. He did not rule out intervening gas prices. Russia has curbed its gas supplies to Germany and will temporarily shut down the NordStream-1 pipeline on July 11 for annual maintenance. In contrast, the risk-off dollar seems more attractive than the Euro. Meanwhile, GBP/USD slumped as well yesterday. The pair was down 1.41%.

Gold price plummeted over 2.4% on Tuesday, rebounded back slightly after touching a daily low below $1764 in the late European session, and is now hovering slightly below 1770.

Technical Analysis:

USDJPY (4-Hour Chart)

USDJPY gained positive traction for the second consecutive day as the risk sentiment favours the US dollar at the time of writing. The outlook of USDJPY consolidated between 134.89 and 137.00 ahead of the FOMC meeting. However, the divergent monetary policies between the Fed and the BoJ should limit the downside of USDJPY. USDJPY has breached the resistance level of 135.7, suggesting an upside momentum in the near- term. On the upside, if the immediate support can sustain and hold, then it would possibly contest the peak at 137.00. On the flip side, if the support fails to defend its position, then USDJPY is expected to consolidate.

Resistance:  135.70, 137.00

Support: 134.89, 134.24, 133.59

GBPUSD (4-Hour Chart)

GBPUSD renewed multi-year lows, hitting levels last seen in March 2020. The outlook of GBPUSD remains bearish as the pair continues to trade below the descending trend line. In the meantime, the bearish momentum is supported by the double-top formation. At the time of writing, GBPUSD is contesting the immediate support level of 1.1899. If the pair can recover at this stage, then it could potentially attract some dip-buying buyers, but bears are still in charge. On the downside, if the support cannot hold, then the pair would accelerate further south. At the moment, the selling pressure seems to moderate a bit as the RSI has reached the oversold condition and the MACD has turned upside.

Resistance: 1.208, 1.2192, 1.2283

Support: 1.1899

Gold (4-Hour Chart)

Gold slid sharply below $1,770 following the extra pace and renewed upside momentum of the safe- haven US dollar. The intraday decline is supported by multiple factors, a stronger US dollar and a hawkish Fed expectation ahead of the FOMC meeting. From the technical perspective, gold is facing a strong selling pressure, suggesting that gold is in the bearish mode. Dropping below the descending channel has brought gold further south. Breaking the channel has accelerated the bearish momentum toward the support level of $1,765. If the support fails to defend, then gold would confront more fresh selling pressure. In the meantime, the double-top formation has been constructed, meaning that gold is in the hands of bears. The current support level might be able to stop the bears a bit as the RSI indicator has reached the oversold territory. Further price action has eyes on the upcoming FOMC meeting.

Resistance: 1791.85, 1818.39, 1821.76

Support: 1765.11