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Gold Price Consolidation to Linger as RSI Flops Ahead of Overbought Zone

Gold Price Consolidation to Linger as RSI Flops Ahead of Overbought Zone

David Song, Strategist

Gold Price Talking Points

The price of gold struggles to retain the advance from earlier this week even though Federal Reserve officials retain a dovish forward guidance, and the precious metal may consolidate over the remainder of the month as the Relative Strength Index (RSI) appears to have flopped ahead of overbought territory.

Gold Price Consolidation to Linger as RSI Flops Ahead of Overbought Zone

The price of gold has traded to fresh yearly highs during every single month so far in 2020, and the break above the November 2012 high ($1754) may keep bullion afloat as the Federal Reserve prepares to launch the Municipal Liquidity Facility along with the Main Street Lending Program over the coming days.

It seems as though the Federal Open Market Committee (FOMC) will actively expand its balance sheet over the coming months as Vice-Chairman Richard Clarida warns that the US economy is expected to “contract at an unprecedented pace in the second quarter,” with the official going onto say that “additional support from both monetary and fiscal policies may be called for.

It remains to be seen if the FOMC will deploy more unconventional tools in 2020 as Clarida insists that the committee “will wind down these lending facilities at such time as we determine the circumstances we confront are no longer unusual or exigent,” and the central bank may carry out a wait-and-see approach over the coming months as US lawmakers try to pass another stimulus program labeled the HEROES Act.

Nevertheless, the FOMC appears to be on track to endorse a dovish forward guidance at the next interest rate decision on June 10 as Chairman Jerome Powell tells Congress that the committee is” committed to using our full range of tools to support the economy in this challenging time,” and the threat of a protracted recovery may push the central bank to deploy more unconventional tools as Vice-Chairman Clarida insists that the Federal Reserve will continue to act forcefully, proactively, and aggressively.”

At the same time, Fed officials may continue to tame speculation for a negative interest rate policy (NIRP) as Chairman Powell and Co. “expect to maintain interest rates at this level until we are confident that the economy has weathered recent events,” but the low interest rate environment along with the ballooning central bank balance sheets may act as a backstop for goldas marketparticipants look for an alternative to fiat-currencies.

In turn, the price for gold may continue to exhibit a bullish behavior as it trades to fresh yearly highs during every single month so far in 2020.

Sign up and join DailyFX Currency Strategist David Song LIVE for an opportunity to discuss potential trade setups.

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 monthly opening range for March as less relevant amid the pickup in volatility, with the decline from the monthly high ($1704) leading to a break of the January low ($1517).
  • Nevertheless, the reaction to the former-resistance zone around $1450 (38.2% retracement) to $1452 (100% expansion) instilled a constructive outlook for bullion especially as the RSI reversed course ahead of oversold territory and broke out of the bearish formation from February.
  • In turn, gold cleared the March high ($1704) to tag a new yearly high ($1748) in April, with the behavior also taking shape in May as the precious metal trades to a fresh 2020 high ($1764).
  • The RSI highlights a similar dynamic as the oscillator breaks out of the downward trend carried over from the previous month, but the bullish momentum may abate over the coming days as the indicator appears to have flopped ahead of overbought territory.
  • Waiting for a close above the $1754 (261.8% expansion) region, which lines up with the November 2012 high ($1754), to bring the $1786 (38.2% expansion) area on the radar, with the 2012 high ($1796) up next.
  • However, the string of failed attempts to close above the $1754 (261.8% expansion) region may push the price of gold towards the May low ($1670), which lines up with the $1676 (78.6% expansion) region, with the next downside hurdle coming in around $1655 (161.8% expansion).

--- 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.