• Gold rallied on Friday, ending a three-week losing streak despite a strong US dollar
• It remains a favored hedge against inflation, maintaining value despite high-interest rates
• Technical analysis shows gold in a consolidation phase, with key support at $2300 being defended

Gold ended a volatile week positively on Friday, breaking a three-week losing streak. Despite the US dollar index strengthening due to a weaker euro, which fell below 1.07 amidst political unrest in France, gold climbed. This turmoil also affected European indices, causing losses between 1.5% and 3.2%, and increased the appeal of gold as a safe-haven asset, especially as the spread between French and German 10-year government bonds widened. Additionally, the Bank of Japan's vague announcement of future bond purchase reductions weighed on bond yields, further boosting gold, silver, and the Swiss franc. At the start of this week, though, we have seen a bit of a rebound for European indices while gold has started on the backfoot. But in light of last week’s mild recovery, and the drop in bond yields, the precious metal may be about to resume higher.

Gold remains favourable despite dollar strength

Gold has been a preferred hedge against inflation in recent years, maintaining its value despite high interest rates and attractive government bond returns. Although global inflation has eased, the disinflation process is slow. The US Federal Reserve's reduction in projected interest rate cuts caused a slight negative reaction from gold traders. However, poor economic data could renew optimism for rate cuts, potentially boosting gold prices. High inflation and wage data could delay policy normalization, affecting gold's appeal. Major central banks, such as the European Central Bank and Swiss National Bank, have begun cutting rates, with others like the Bank of England and US Federal Reserve expected to follow. The extent of future rate cuts depends on economic data, with more cuts potentially lifting gold prices. Demand for gold remains strong due to high inflation and currency devaluation, limiting downside risks for gold prices in the year's second half.

Gold technical analysis and trade ideas

Technically, Friday's gold rebound is a positive sign, but the metal is in a consolidation phase requiring patience. Currently, gold is holding inside a bull blag pattern, which has helped the RSI to work off its overbought conditions. A potential rally could be forthcoming after the Fed meeting and CPI data release are now both out of the way. Bulls have pushed gold above short-term resistance at $2330, aiming to break the bearish trend line around $2365 area. If we see a move above this level, then that would provide the clearest signal yet that the bull trend has resumed. The $2300 support level has held despite several breaches, and no bearish follow-through occurred after last Friday's sell-off. However, a daily close below $2300 in the coming week could turn the short-term XAU/USD forecast bearish, potentially leading to selling toward the next support level at $2222.

Summary

Gold has again demonstrated resilience in the face of a strong dollar, by ending a three-week losing streak with a rally, shrugging off the sell-off in the positively correlating EUR/USD pair amidst political turmoil in France and following policy decisions from the Bank of Japan and US Federal Reserve last week. It continues to be a favoured hedge against inflation, maintaining its value despite high-interest rates and eased inflation. Future rate cuts by major central banks may further boost gold prices. Technical analysis shows gold in a consolidation phase, with important support holding firm.

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