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Summary: The rise in gold prices is based on the weakness of the U.S. dollar rather than market-driven bullish sentiment. A resumption of the upward trend is expected.

Fundamentals

The Consumer Price Index (CPI) has fallen to its lowest monthly gain since August 2021 in June, according to the latest inflation report released by the U.S. Department of Labor. Seasonally adjusted, the CPI for all urban consumers rose by 0.2% in June, following a 0.1% increase in May. Over the past 12 months, the index for all items before seasonal adjustment has increased by 3.0%.

Core inflation slowed to 4.8% last month from 5.3% in May. The significance of this decline lies in the fact that the Fed considers core inflation as the best predictor of inflation trends. However, the core inflation rate of 4.8% is still more than double the Fed's target of 2%; therefore, despite the decrease last month, the report indicates ongoing concerns with overall inflation and core inflation, as high prices each month continue to impose a burden on consumers.

Following the slightly lower-than-expected inflation report from the U.S. Department of Labor, gold prices surged significantly, reaching a three-week high with a substantial gain. The most active August futures contract is currently holding above $1,960. However, as we have seen in the past few weeks, the rise in gold is more related to the weakness of the U.S. dollar rather than the slowdown in inflation driving up precious metal prices.

In the past few trading days, the U.S. dollar has experienced its most severe consecutive decline since January 2023 and is now approaching the 100.00 psychological level. Considering that gold has risen 1.34% while the U.S. dollar index has fallen 1.14%, today's modest 0.2% increase in gold prices can be attributed to investors bidding up the price of gold.

Meanwhile, the U.S. dollar index traded around the 103.00 level on July 6th, accumulating a 2.75% decline over the past five trading days, while gold rose approximately 2.13% during the same period. The data suggest that the recent rise in gold prices over the past five trading days is a result of the weakness in the U.S. dollar rather than convincing market sentiment driving investors to push up gold prices, as gold remains in a downward trend.

In yesterday's trading, we believed that if the June inflation report showed a significant decline in inflation, gold prices would easily reach the first resistance level at $1,955. After the data release, not only did gold surpass this key level but also closed above it. This means that the current resistance level must be revised upward to $1,971 (corresponding to the 50-day SMA) and the major resistance level at $1,980 (corresponding to the 38.2% Fibonacci retracement).

Next, gold prices may continue to rise towards the $1,971-$1,980 range. However, it must be reiterated that further upside in gold prices will continue to be based on the weakness of the U.S. dollar rather than market-driven bullish sentiment.

Technical Analysis

Gold prices have been steadily rising since reaching $1,893 in late June. After breaking through the $1,940 level yesterday, it accelerated its upward movement to a key resistance level of $1,963.

Currently, gold prices are hovering near the familiar trading range, which may result in a retest of the support level at $1,948. However, the market is unlikely to break further down to ensure the intactness of the upward trend.

From a technical perspective, short-term risk appetite remains optimistic as both the RSI and MACD comfortably sit above neutral levels. However, as the indicators appear to have lost some momentum, caution may be warranted for the bulls, and holding positions for too long may not be advisable.

Overall, the short-term upward trend in gold is likely to maintain buying interest in the coming trading days. Sustaining above $1,948 will continue to boost market sentiment, while a renewed drop below $1,930 may bring greater upward pressure to the market. In terms of trading strategies, focus on buying the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 1948

Target Price: 1979

Stop Loss: 1927

Valid Until: 2023-07-27 23:55:00

Support: 1941, 1933, 1930

Resistance: 1960, 1964, 1971