Gold is trading little changed on the day after failing to set new highs for the week. Nonetheless, the fact that Monday’s flash crash was nearly completely retraced is seen as encouraging.
Markets seemed to be a bit confused by all the newfound, but unsupported hawkishness. Yesterday the ECB’s Mario Draghi surprised with a rather hawkish tone. While the central bank tried to walk that back today, the euro remains well bid. BoE Governor Mark Carney has now added his voice as well.
“Some removal of monetary stimulus is likely to become necessary,” said Carney. His hawkish tone emerges just weeks after an election upset and right in the midst of Brexit negotiations. Sterling surged to 3-week highs putting further pressure on the dollar.
The Fed was the first mover on hawkishness, resulting in a multi-year rally in the greenback. However, as Fed tightening has proven to be much slower than expected, the dollar rally has faltered. With the ECB and BoE now making noise about normalization (narrowing interest rate differential) the dollar index has fallen to new 7-month lows.
A weaker dollar tends to be supportive to the gold price, as gold is priced in dollars. As long as the greenback remains under pressure, it is likely that the yellow metal will remain underpinned. If gold is able to move back above resistance at 1257.41/1258.90, the highs for the year at 1295.03/1296.06 would be back in play.