- US dollar rally stays near 16-month highs.
- Gold trading in a tight range amid dollar softness.
- USDCAD powers through 1.2600 as the oil prices tank.
Exhaustion is slowly kicking in, on the dollar strengthening to 16-month highs amid concerns about runaway inflation. Indecision appears to be the order after the dollar index got rejected at 96.28. A pull back from the 16-month high Thursday morning saw the dollar post its biggest daily loss in the week.
The dollar has been in fine form for the better part of the week, supported by better-than-expected retail sales data on Tuesday. Red hot inflation has also bolstered talk of the Federal Reserve hiking interest rates mid-next year. While the USD continues to hover near the 16-month highs, it has lost some ground against the majors as the upward momentum continues to stall.
Gold technical analysis
Amid the dollar softness, gold is holding steady on its bullish territory despite being rejected at five-month highs. XAUUSD has been stuck in the tight trading range of between $1870 and $1866 after initially touching highs of $1876.
The $1867 level has emerged as the short-term resistance level curtailing further upside action on the precious metal. A rally followed by a close above the level could pave the way for bulls to make a run for the $1900 handle.
On the flip side, the $1850 level is the immediate support level above which XAUUSD remains well prepared for further upside action. A breach of the support level could trigger renewed sell-off that could see gold dropping to $1834, the next substantial support level.
Why XAUUSD is bullish
The upward momentum on Gold has in recent days been supported by rising inflation. Market participants have shrugged rising treasury yields in favor of the precious metal, which acts as a hedge against inflation, most of the time.
With the dollar coming under pressure near 16-month highs on treasury yields retreating from levels not seen since late October, Gold could be in for another leg higher. While the precious metal has continued to edge higher amid dollar strength, the greenback weakening could be the catalyst to fuel another leg higher.
However, XAUUSD’s upward momentum could be curtailed as FED policymakers remain divided on the inflation woes. Concerns that the FED could move much earlier to hike interest rates to stamp on the runaway inflation could curtail the XAUUSD rally. Interest rate hikes often trigger strong demand for bond yields and treasuries, given the higher returns that investors stand to generate from higher benchmarks.
Heading into the weekend, the lack of substantial economic data may keep the market on edge. The 10-year breakeven inflation rate dropping for the second consecutive day has already started fuelling suggestions that inflation is receding. A decline in inflation could exert downside pressure on the dollar and bond yields which could see Gold edging higher.
USDCAD turns bullish
Meanwhile, USDCAD powered to one and a half month highs as the Canadian dollar came under pressure on oil prices tanking below the $80 a barrel level. The pair has since powered through the 1.2600 level as a bounce back from four-month lows continues to gather steam.
Oil prices were lower on Thursday for a second consecutive day as market participants reacted to calls by the US for major oil consumers of China and Japan to consider releasing oil reserves in a bid to lower prices. The US is pushing for a release of the reserves as it seeks to curtail the surging oil process, which has contributed to record-high inflation.
A slide in oil prices continues to hurt the oil price-sensitive Canadian dollar, consequently the rally on USDCAD to a seven-week high. The pair finding support above the 1.2600 could pave the way for a bull run to highs of 1.2660.