US Dollar Index: A move into the 104-105 range into the Fed meeting

The dollar has remained bid ahead of tomorrow’s Federal Reserve meeting. Analysts at ING think it is still risky to pick the top in the dollar rally given the prospect of aggressive tightening and the challenging global environment for risk.

Dollar remains supported into the FOMC

“Even if the Fed-induced strength might appear more limited now that an aggressive tightening cycle has been priced in, an external environment where markets find other key non-US markets unattractive (namely, China due to lockdowns, Europe due to geopolitical risk, other emerging markets due to tightening financial conditions) offers quite a solid floor to the dollar.”

“We continue to see high-beta/commodity currencies being at risk in the current choppy environment for risk sentiment, and the DXY (where low-yielders have a big weight) may not be a very indicative benchmark for dollar strength at the moment. Still, a move into the 104/105 range into the Fed meeting seems reasonable.”

Gold Futures

Open interest in gold futures markets reversed two consecutive daily builds and shrank by just 585 contracts at the beginning of the week according to advanced prints from CME Group. On the other hand, volume went up for the second straight session, this time by around 17.3K contracts.

Gold looks supported near $1850

Monday’s marked pullback in gold prices was on the back of shrinking open interest, which somewhat slows the pace of the downtrend. Against that, the yellow metal is expected to meet decent contention in the $1850 region in the very near term.

In the middle of last month, the pressure on gold intensified after a failed attempt to climb above $2000.

There was a similar disappointment for the bulls in silver when they failed once again to consolidate the price above the meaningful $25 round level.

The US dollar has strengthened by 5.8% since April, contributing significantly to the base appreciation in metals and other commodities.

In our view, gold and silver might continue their downward trend until FOMC comments or until the monthly labour market report. 

The potentially important support is around $1835, the 200 SMA. The performance of gold near that mark could lay the foundations for a prolonged trend, whether it is a reversal to the upside or a final capitulation of the buyers.

In a pessimistic scenario, the gold price could retreat below $1500 by the end of the third quarter. But suppose the Fed comments return demand for risk. In that case, the momentum in the precious metals could renew and give an informal start to the rally to update historical highs in gold .

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