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Abstract: On Friday, gold prices paused after breaking below the psychological level of $1900 in the previous trading session. However, the halt at the round number support does not necessarily indicate the end of the downward trend for gold.

Fundamentals

Gold prices suffered a sharp sell-off, influenced by better-than-expected U.S. gross domestic product for the first quarter and weekly initial jobless claims, which further underscored the strength of the U.S. economy and reduced the demand for safe-haven assets. The breach of the crucial $1,900 level paved the way for a new downside structure in the recent gold price decline.

On Thursday, the U.S. Bureau of Economic Analysis released the final estimate for Q1 2023 GDP, showing a quarter-on-quarter annualized growth rate of 2%, significantly higher than the previously forecasted 1.3%. In terms of sub-indicators, GDP was revised upward mainly due to upward revisions in consumer spending and export data, and weaker-than-expected inventory investment. The upward revision in GDP reinforced market expectations of the resilience of the US economy, which also implies stickier inflation.

It is worth noting that during the European Central Bank meeting held in Sintra, Portugal on Wednesday, Federal Reserve Chairman Powell expressed optimism about the U.S. economy and lowered the possibility of an economic downturn. Despite modest growth, the economy is still expanding.

After ten consecutive interest rate hikes by the Fed, a series of rate hikes were recently suspended. Powell mentioned that the Fed's goal is to slow economic growth and reduce consumer demand to curb inflation, as the current inflation rate is twice the Fed's 2% target.

The remarkable resilience of the economy will only make the Fed more cautious and convince policymakers of the need for further tightening measures to control inflation. It now appears highly likely that there will be a rate hike in July, as the market has already priced in this possibility.

Furthermore, the recently released Fed stress test report showed that major banks can withstand losses from an economic downturn and a decline in real estate prices, reducing investor concerns about financial risks. The aforementioned data and the results of the stress test support further rate hikes by the Fed.

Lastly, the adoption of a tougher stance by the major central banks and the prospect of further rate hikes continue to pose upward resistance to gold, which offers no yield. Beyond that, the emergence of fresh buying pressure on the U.S. dollar is another factor driving funds out of safe-haven markets. Indeed, the U.S. dollar index, which tracks the greenback against a basket of currencies, continued to climb to a new two-and-a-half week high in the past session, gaining support from expectations of further policy tightening by the Fed. All these factors are bearish for gold.

Technical Analysis

Gold prices broke below the psychological level of $1,900 for the first time since mid-March this year, continuing the bearish trend that began on June 2, 2023. However, after a swift breakthrough above $1,900 yesterday, the price quickly rebounded, revealing some psychological resistance within that range.

Momentum indicators show some divergence. The RSI remains below the 50 range, confirming the current bearish momentum. Additionally, the Average Directional Index (ADX) has surged to an extremely high level, reflecting the potential strength of the current downward trend and showing preliminary signs that the index may be nearing a peak. The price decline is also approaching recent lows.

If bears believe that the current target has not yet reached its endpoint, they must decisively break through the $1,890 level to ensure the integrity of the downtrend. The target is the low point of $1,860 from February 6, 2023.

Although the stochastic oscillator is experiencing a minor rebound, it indicates that the market's pause is not sufficient to halt the bearish trend. If the stochastic oscillator breaks its descending trendline, bulls will have an opportunity to partially recover recent losses. The targets are above $1,909, followed by $1,913. However, any price increase should not surpass $1,924. Otherwise, it could trigger further bullish corrections, subjecting the current downward trend to a rigorous test.

Overall, after breaking below the $1,900 psychological level, gold prices remain firmly bearish in the short term. While the significant rebound following the sharp price drop may create market anxiety, the battle for the $1,900 level has just begun. From a trading perspective, it is recommended to go short at highs.

Trading Recommendations

Trading Direction: Short

Entry Price: 1913

Target Price: 1860

Stop Loss: 1940

Valid Until: 2023-07-14 23:55:00

Support: 1885, 1869, 1856, 1845

Resistance: 1900, 1909, 1924, 1932