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Gold Price Rally to Persist If RSI Pushes Into Overbought Territory

Gold Price Rally to Persist If RSI Pushes Into Overbought Territory

David Song, Strategist

Gold Price Talking Points

The price of gold clears the March high ($1704) as the Federal Reserve plans to provide $2.3T in loans to US households and businesses, and the precious metal may extend the advance from earlier this month if the Relative Strength Index (RSI) pushes into overbought territory.

Gold Price Rally to Persist If RSI Pushes Into Overbought Territory

The price of gold climbs to a fresh yearly high ($1724) as the Federal Reserve unveils the ‘Main Street Lending Program’ along with additional unconventional tools in order to “provide powerful support for the flow of credit in the economy.

Image of Federal Reserve announcement

Source: Federal Reserve

The announcement suggests the Federal Open Market Committee (FOMC) will continue to deploy non-standard measures to support the US economy as the central bank “remainscommitted to using its full range of tools to support the flow of credit to households and businesses to counter the economic impact of the coronavirus pandemic.”

At the same time, recent remarks by Fed Chairman Jerome Powell indicate that the FOMC may take additional steps to combat the economic shock as the central bank head pledges “to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.” In turn, the FOMC may continue to endorse a dovish forward guidance at the next interest rate decision on April 29 as “the Fed's role is to provide as much relief and stability as we can during this period of constrained economic activity.”

The unprecedented efforts appear to have propped up investor confidence amid the advance in US equity prices, but it remains to be seen if the slew of non-standard measures will have unintended consequences as major central banks push their benchmark interest rate close to zero and rely on their balance sheets to boost economic activity. With that said, the low interest rate environment may continue to act as a backstop for goldas marketparticipants look for an alternative to fiat-currencies.

As a result, the broader outlook for bullion remains constructive as the reaction to the former-resistance zone around $1450 (38.2% retracement) to $1452 (100% expansion) helped to rule out the threat of a Head-and-Shoulders formation, with a similar scenario arising in March as the price of gold reversed course from the monthly low ($1451).

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Gold Price Daily Chart

Image of gold price daily chart

Source: Trading View

  • The opening range for 2020 instilled a constructive outlook for the price of gold as the precious metal cleared the 2019 high ($1557), with the Relative Strength Index (RSI) pushing into overbought territory during the same period.
  • A similar scenario materialized in February, with the price of gold marking the monthly low ($1548) during the first full week, while the RSI broke out of the bearish formation from earlier this year to push back into overbought territory.
  • However, the price of gold has failed to maintain the monthly opening range for March after trading to a fresh yearly high ($1704), with the decline producing a break of the January low ($1517).
  • Nevertheless, the reaction to the former-resistance zone around $1450 (38.2% retracement) to $1452 (100% expansion) casts a constructive outlook for bullion especially as the RSI reverses course ahead of oversold territory and breaks out of the bearish formation carried over from the previous month.
  • The break/close above $1710 (100% expansion) brings the Fibonacci overlap around $1733 (78.6% retracement) to $1739 (100% expansion) on the radar, with the next area of interest coming in around $1754 (261.8% expansion).
  • Will keep a close eye on the RSI as the indicator approaches overbought territory, with a break above 70 likely to be accompanied by higher gold prices as the bullish momentum gathers pace.
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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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