The price of gold has climbed to nearly $3,370 during the European session, following a minor dip in the US Dollar. Traders are adjusting their outlook on Federal Reserve policies after looking at June’s US Consumer Price Index data.

US Dollar Performance

The US Dollar Index (DXY) dropped to around 98.15 from about 99.00. The US Dollar generally weakened against major currencies, particularly against the British Pound. The chance of a rate cut by the Fed in September has fallen to 58.5%, down from nearly 70% a month ago, as shown by the CME FedWatch tool. Currently, gold trades within a Symmetrical Triangle pattern on the daily chart, indicating less volatility. Important support is around the 20-day EMA at about $3,340, while resistance levels are at $3,550 and $3,600 if the price surpasses $3,500. Gold is seen as a safe-haven asset in tough economic times and serves as a hedge against inflation. Central banks, the largest holders of gold, have increased their purchases significantly in recent years to diversify their reserves. Gold often moves in the opposite direction of the US Dollar and risk assets; it tends to rise when the Dollar weakens. Various factors such as political instability and interest rates can affect its price.

Market Positioning and Strategies

In the current market, the dip in the US Dollar Index to 105.50 seems like a minor correction rather than a full reversal. Trader positioning is changing after the latest US Consumer Price Index reported annual inflation at 3.3%, slightly lower than expected but enough to keep the Federal Reserve from changing its course. This creates uncertainty around policies, directly impacting precious metals. With the probability of a rate cut in September now about 65% according to the CME FedWatch tool, confidence appears to be waning. We believe this indecision will keep gold prices in check, limiting significant upward moves in the near term. This fluctuating expectation is evident in gold’s price movements. Given the reduced volatility indicated by the Symmetrical Triangle pattern, we recommend a long straddle strategy for traders. This involves buying both call and put options, allowing a portfolio to profit from a significant price move in either direction once the pattern breaks. Such a move is expected as new economic data will compel central bankers to choose a clearer path. Historically, gold tends to rise in the months leading up to the first interest rate cut of a new cycle, as seen before the easing period in 2019. Supporting this, the World Gold Council reported that central banks bought a record 290 tonnes in the first quarter of 2024, setting a strong base for the market. This demand makes selling cash-secured puts below key support levels an appealing strategy for generating premium. We are closely monitoring the 20-day EMA, currently near $2,330, as the critical battleground. A solid break below this level could lead to a sharper correction, while a sustained move above resistance at around $2,400 would indicate the next upward trend. Derivative traders should thus set their strike prices for options strategies around these important technical levels in the upcoming weeks. Create your live VT Markets account and start trading now.

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