Gold and the US dollar post Brexit

Ten days on from the momentous Brexit vote seems a good time to reflect on and review some of the principle markets and indices particularly as it coincides with the start of a new trading month, and the usual raft of PMI data.

The first chart to consider is the USD index which ended June strongly higher, and following through on May’s bullish engulfing candle. However, what is interesting is that the majority of this move occurred, unsurprisingly, on the Friday following the Brexit vote. This price action can be seen most clearly on the 240 min chart which shows the extent of move in the index as it surged from the 11700 region to a high of over 12000 at the beginning of this week, before remaining relatively range bound as markets have calmed.

The surge higher in the USD was only to be expected as traders and investors rushed to move money into safe havens. However, a stronger USD, often results in a fall in gold, but the extreme market over reaction to Brexit resulted in both the USD and gold rising in tandem. Such moves have happened in the past, most recently when the euro was under threat.

For gold this current crisis is exactly what the precious metal has needed to push it through $1320, a key level and one that marks the upper boundary of a consolidation region that stretches back to 2013. Gold’s dramatic price action last week saw the precious metal post a $100 plus candle, but which closed Friday’s trading session with a deep upper wick, closing out at $1322 per ounce, with many traders taking profit ahead of the weekend.

Last week saw the precious metal trade within the spread of this candle, and confined to $40 range as traders and investors took stock. However, gold’s move through the $1320 price point is hugely significant, and for the bullish momentum to continue the metal now needs to regain the Brexit high of $1362 on strong and rising volume which, if achieved, will lay the groundwork for an attack at the psychological $1400 per ounce. What will also benefit the gold price is the return of the more usual USD/gold relationship, whereby a falling dollar leads to higher commodity prices overall.

For the USD the FED now awaits, first with the release of last month’s minutes, and later in July the FOMC, where the consensus seems to be Brexit has put paid to any immediate increase in interest rates. Brexit certainly appears to have given the FED their own ‘get out of jail’ card where interest rates are concerned, allowing for a further postponement. But once the dust has settled, the next major event on the horizon is, of course, the US presidential election in November.

In early trading the August gold contract touched a high of $1360.30 before falling back to trade, at time of writing of $1354.70. With the US markets closed for the 4th July holiday gold trading may be somewhat muted today, but nevertheless gold and indeed many other commodities now seem to be awaking from their long slumbers and finding some much needed bullish momentum which will no doubt give further cheer to the gold bugs. Indeed it is a pleasure to be writing something positive about gold, and with silver also looking very bullish, the outlook for the metals sector looks positive in the longer term.

By Anna Coulling

Charts from NinjaTrader and indicators from Quantum Trading