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Abstract: Gold prices moved lower for the third day in a row, with the decline expanding to a key level ($1969) during the European trading session. Although gold prices may continue to be bearish later, we believe that there are still opportunities for gold prices to go long in the short term.

Fundamentals

Gold's recent move has been impressive and also in line with our expectations for several days. In yesterday's market, comments from Fed officials combined with the release of relatively strong industrial production data pushed gold prices back to their mid-April lows.

The Cleveland Fed Chair Loretta Meester noted that the federal funds rate has not yet reached a level where the central bank can stop tightening given the resilience of inflation. The New York Fed Chair John Williams noted that inflation is gradually moving in the right direction, but remains unacceptably high.

In addition, the bond market was positive about the outcome of McCarthy's discussions with Biden on the debt ceiling (although no agreement was reached). At the same time, the report of industrial production growth of 0.5% in April was also positive, with manufacturing up 1%, well above expectations.

As a result, the market is again pricing in a more than 20% chance of another rate hike in mid-June. These are far from extreme levels, as the probability has been above 30% since the second half of April. Nevertheless, this revision in expectations is creating some momentum for the U.S. dollar. The U.S. dollar index has risen 2% since last week, putting pressure on the precious metals market.

As a result of yesterday's decline, gold prices have broken the bullish trend formed at the end of March and continue to face a third selling pressure from $2,023 that started during the European session on Thursday. Gold prices are facing a fierce battle at a key level of $1,969 as high optimism about raising the U.S. debt ceiling (which is bullish for the U.S. dollar) continues to weigh heavily on the precious metal. The market is now expecting gold prices to move further lower after breaking below that key level.

At this key level, gold is approaching its 50-day SMA, which rebounded at the end of last year and was confirmed by an uptrend in March of this year. (The slightly below $1970 average is the 61.8% retracement from the March low to the early May high. )

From this perspective, a sharp correction below $1,970 would be an important signal of a sudden change in market sentiment, forcing gold prices to fall further to $1,950.

However, there does not seem to be a consensus in the current market on expectations for a fall below $1,970. The short-term correction has cleared the overbought condition in the daily chart and opened up the upside channel. If gold's upside momentum finds solid support, the next round of gains could push gold to the psychological level of $2,000, or higher, stopping at the $2,023 level.

Investors are now focusing on U.S. economic data, including weekly first-time jobless claims, the Philadelphia Fed Manufacturing Index, and existing home sales data released early in the New York session. Beyond that, negotiations on the US debt ceiling, and broader risk sentiment will drive demand for the U.S. dollar and generate more short-term trading opportunities in precious metals.

Technical Analysis

Since breaking its record high of $2,074, gold prices have started three consecutive corrections. In yesterday's trading, the bulls tried to recover some of the lost ground, but prices have remained under pressure so far due to a break below key support. But will gold prices continue to fall back to our previous target of $1,920 in the near term? Clearly not.

The market is now battling over key support at $1,976 and the effective lower limit at $1,969, which overlaps the 38.2% Fibonacci retracement of the $1,804-$2,079 uptrend. Given the oversold signals shown by the Relative Strength Index and Stochastic Oscillator, the short-term downtrend could face an adjustment or consolidation. If the selling pressure persists, prices will seek support near the February high of $1,960. A 50% Fibonacci retracement of $1,945 would limit the further downside to $1,925 in the near term.

On the bright side, however, (as noted) there is currently no consensus in the market for further price declines, and instead, mutually chasing bullish sentiment is on the rise. However, any attempt to rally above $2,000 would need to face strong resistance from $1,986 and $1,993. That said, continued strength could trigger a short-covering rally and push gold prices further up to the $2,020 mark.

Overall, gold may turn back to the downside later in the day. However, before more selling occurs, short-term corrective rebounds will attract interest in buying on dips. In terms of trading strategy, it is recommended to buy the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 1976

Target Price: 2023

Stop Loss: 1944

Valid Until: 2022-06-01 23:55:00

Support: 1969, 1960, 1950

Resistance: 1986, 1993, 2000