Gold slows down after seeing a rise of 9%. Like in many assets, the rally was fueled by weak US inflation data and hopes that the Fed's aggressive monetary tightening is about to end.
As we previously wrote, there is no point in relaxing and believing that the economy has already "digested" all the negative events. The Federal Reserve is likely to deliver a 50-basis-point interest rate hike instead of a 75-basis-point rate hike, as expected. However, according to Fed officials' remarks, they will hike rates until it affects inflation. Now it is difficult to predict this rate, as constantly changing data influences the Fed's decisions.
A longer downward trend in inflation is needed to change aggressive pace of monetary policy. Only after that the Fed will announce how they will cut the rate. If they make changes in the monetary policy now, a new cycle of the inflationary spiral may appear. This is the reason why the Fed is likely to hedge.
Thus, the key rate will continue to rise, although its dynamics will slow down. The rate hike negatively influences gold, that's why correction in the metal after the recent rally is expected. Let's find the targets for the decline with the technical analysis.
According to it, gold tested and bounced down from the Fibonacci level of 0.382 and the 200-day moving average. An exit above these levels will mean that it will keep rising, so this level will be our stop ($1790). The RSI indicator, which is at a local high, also demonstrates that the gold is overbought.
The Fibonacci level of 0.236, which is in line with the last local highs in gold ($1725), might be the target for it.
According to the chart, gold tested every Fibonacci level very clearly in the current correction. Each breakthrough to a new level happened from the second attempt. Now we have witnessed the first touch of the 0.382 level, so we are waiting for the correction, after which it may attempt one more time to break through this level.
Given all the factors, it's preferable to open short positions in gold under the following conditions:
Take profit – $1725
Stop – $1790