Gold still pressured as dollar stays supported and risk appetite remains high

A mild shake-up in US markets occurred late on Tuesday after two potential risk events surfaced: President Trump unexpectedly fired FBI Director James Comey, and a North Korean official issued a threat of more nuclear tests. As of Wednesday morning, however, these incidents have not significantly deterred a continuing risk-on market environment and recent rebound for the US dollar.

While US stocks were modestly down and the dollar was relatively flat overall on Wednesday morning, safe-havens like gold and the Japanese yen failed to see any substantial boost. It appears that unless a catastrophic risk event occurs, markets are currently shrugging off most concerns and sustaining the high risk appetite and low market volatility that have been in place for the past three weeks.

Much of the sharp down-move in gold since mid-April can be attributed to this lack of risk aversion in the markets, which has decreased demand for the perceived safety of the precious metal. In addition, earlier this week saw a significant rebound for the US dollar after it had pulled back against other major currencies for much of April and early May. This very recent strengthening of the US dollar has helped to exacerbate pressure on dollar-denominated gold. Furthermore, with the US Federal Reserve on a relatively clear track to raise interest rates, and the latest US employment data last week helping to support an expected June rate hike, non-yielding gold could be pressured even more as interest rates rise.

This trio of factors weighing on gold – risk-on markets, a rebounding US dollar, and a potentially rising interest rate trajectory – may likely serve to push the price of gold lower after its recent breakdown. In early May, only around a week ago, gold broke down below the key $1250 level as well as its 50-day moving average, and then went on to break below a major rising trendline extending back to December’s $1125-area lows. Since that breakdown, the price of gold has followed-through further to the downside, recently dropping below its 200-day moving average as well. Barring any major unexpected risk events on the immediate horizon, gold has currently opened a rather clear path towards the key $1200 psychological support level, which was last hit in March. Any further breakdown below $1200 would constitute a critical technical event that could pave the way towards the $1150 and $1125 support targets.