Is the Dollar’s Grip on Gold Loosening?

The dollar is losing momentum with a flock of doves in the Fed.

Bullion.Directory precious metals analysis 25 February, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

The US dollar index has been unable to establish any momentum of late. Price action still remains elevated, but it has traded largely sideways with a slight downward trajectory.

Last Thursday, I tweeted a chart of the DXY that showed price action consolidating after failing to breakout to new highs:

Since publishing http://t.co/RvoPuZEO5Z the $DXY has gone to no man's land. Potential to reach 200-4H EMA? pic.twitter.com/BkdFsuV7t4

— Chris Lemieux (@Lemieux_26) February 19, 2015

Since then, price action on the 4H chart has respected trend lines rather well. The major, intraday descending trend from the 95.5 high has been tested and held.

Traders’ bullish sentiment is being tested with the Federal Reserve as dovish as ever. This month’s FOMC minutes highlighted the Fed’s worries about potential global risks that could derail economic growth domestically, while admitting lower crude prices might actually cause problems in the form of mass layoffs.

The language is setup in a way to have market participants assume a rate hike is on the horizon and could happen at any moment, while the unwillingness to detach from near-zero interest rates remain well rooted with the Fed’s core.

Eurodollar traders are pricing in a different outlook. What first began as a potential rate hike in June was pushed back to September, with the likelihood falling from 62 percent to 53 percent. Following the FOMC minutes release, traders pushed the rate hike potential back to October. Most analysts do not see the Fed touching rates at all in 2015.

The dollar is likely to trade lower, finding support at 93.95.

The dollar’s influence on gold is waning, too. The 10-year inverse relationship of the two assets only stands at .41. Strong, but probably not as strong as many thought. The inverse correlation between the dollar and gold has greatly weakened over the last few months.

From a very strong negative correlation of .72 in December, gold’s rally in January pushed the correlation down to negative .1, which is very weak. Currently, the 30-day correlation coefficient is negative .2 – still very weak.

With the US economic data severely under-performing, the dollar’s grip of gold is loosening.

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