The gold market slid lower in overnight and early trading Monday, pressured in part by moderate strength in the U.S. dollar. Fundamentally and technically, the U.S. dollar is poised for potential near-term gains, which in turn could weigh moderately on the gold market.
Inverse dynamic could weigh on gold. On one hand, the gold market became slightly overextended on the upside last week, following strong price gains. And, on the other hand, the U.S. dollar index fell toward the bottom of a recent neutral range and is now turning higher from that floor. The inverse relationship between gold and the dollar could pressure the metal near-term as the dollar bulls gather momentum.
Factors that could support the dollar, which would be gold-bearish:
The dollar index has been trapped in a large sideways range since mid-May. The dollar fell toward the lower reaches of that neutral range last week and turned higher. In a typical range trade environment, the dollar would now be vulnerable for a push toward the middle or top of the range.
Initial resistance and bullish target for the dollar index lies at 96.70, the Sept. 25 daily high.
Fundamentally, the dollar remains the “best of the worst.” While the timing of a US Federal Reserve rate hike remains highly uncertain, the American central bank is still expected to hike at some point over the next several months. The European Central Bank (ECB) meets on Thursday and there is speculation they could extend their quantitative easing program beyond September 2016.
Bottom line: Monetary policy outlook differentials favor the dollar.