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Summary: As the Federal Reserve enters the final phase of its tightening cycle, the gold market shines once again. However, investors may misjudge the market; the current significant rebound in gold prices could stall around $1,993, completing a test of the unfinished supply zone before reversing.

Fundamentals

CME's FedWatch tool predicts a 99.8% probability of the Fed raising interest rates by 25 basis points at the next FOMC meeting on July 26. This rate hike is likely to mark the end of the Fed's rate-raising cycle that began in March 2022, as the latest CPI and PPI reports indicate that inflation pressures are easing and getting closer to the Fed's 2% target.

Inflation in the U.S. has declined significantly from its peak of 9.1% to 3%. The Producer Price Index (PPI) for all commodities excluding food and energy declined by 0.2% as of June. A survey conducted by the University of Michigan shows that the Consumer Sentiment Index soared to 72.6% in July, up 13 percentage points from June.

If the Fed is "data-dependent", as they have long claimed, then these recent reports suggest that the U.S. economy has contracted sharply, reducing the level of inflation.

CME's probability indicator is forecasting an 87.9% chance of no rate change at the FOMC meeting in September, a 71.8% chance in November, and a 64% chance in December.

Expectations of the Fed ending its rate hike cycle continue to support gold.

Gold reached a historical high in the first week of May, briefly touching $2,081, and then pulled back below $1,900 on June 20. Currently, the most active gold futures contract for August showed a slight decline of $0.40 or 0.02%, and remained unchanged, at $1,980.40.

It is reasonable to assume that if the market is certain that a series of rate hikes has come to an end, market sentiment will turn bullish. More importantly, when the Fed indeed initiates its first rate cut (possibly as early as the first quarter of 2024), bullish market sentiment is expected to return, challenging the recent high in gold prices.

However, on Thursday, gold prices failed to rebound back into positive territory after retracing from the $1,980 range, indicating a renewed decline. This move occurred against the backdrop of increasing open interest, which could support the continuation of the rebound in the short term to complete the supply zone test.

Technical Analysis

After briefly retracing its gains late last week and early this week, gold prices rose again on Thursday, testing the recent high at $1,987 during the European session. As a result, the market's prevailing sentiment is now focused on reaching $2,000 or higher. However, as we have emphasized before, the end of this round of gold rebound is approaching, with a test of the supply zone around $1,993 imminent.

The bulls reversed their momentum before the New York session at the $1987 level and broke below a key support level. This signal indicates that our expectations were correct.

Overall, gold has been steadily rising since early July, and the golden cross between the 50-period and 200-period SMAs could provide additional impetus. However, as the price is already in overbought territory, continuing to go long is now not recommended. In terms of trading strategy, going short at highs should be the main approach.

Trading Recommendations

Trading Direction: Short

Entry Price: 1975

Target Price: 1860

Stop Loss: 2003

Valid Until: 2023-08-03 23:55:00

Support: 1964, 1948, 1937, 1927

Resistance: 1985, 1993, 2000, 2004