Gold slumped to a 16-month low last week but managed to recover and end the week with a 1.1 per cent gain bringing a halt to its five week losing streak. Despite the recovery, there is little encouragement for yjegold bulls as they face the next big challenge which is the Fed‘s monetary policy decision in the coming week.

Gold has behaved more like a commodity rather than a safe haven or an inflation hedge in the last few weeks and this trend still remains intact. The general market sentiment is still US dollar versus riskier assets like commodities and equities.

The US dollar index has been on a rise since the start of the year but the pace of gains intensified since the start of this month as growth worries and Fed’s tightening expectations pushed investors towards the currency.

While there is no major development to highlight a change in the trend of US dollar, it is struggling to build on the momentum amid lack of fresh triggers and this has made it vulnerable to profit taking.

The US dollar index fell 1.2 per cent last week marking its first decline in four weeks and has corrected more than 2 per cent from the 2002 high set earlier this month. Based on weekly RSI reading, the dollar index has been in overbought territory for quite some time now which may have made it susceptible to correction.

The US currency lost momentum as it faced challenges from disappointing US economic data and monetary tightening by other central banks.

US economic numbers have been mixed however some disappointing data last week highlighted increasing stress in the economy. US weekly jobless claims rose to the highest level in eight months. Philadelphia Fed’s July factory activity index contracted for the second straight month in July. Leading indicators index fell for the fourth straight month, adding to the debate about a recession. Meanwhile, services PMI fell below 50 level indicating contraction in the sector.

Outlook for the US economy has deteriorated as the US central bank has embarked on aggressive monetary tightening to get inflation under control. With dismal economic readings, market players are expecting the Fed to take a more measured approach.

The dollar rally in the last few months has also been on expectations that the Fed may lead other central banks in monetary tightening. The US currency lost momentum last week also as European Central Bank joined other central banks in monetary tightening

ECB raised interest rate for the first time since 2011 and decided to raise lending rate directly by 0.5 per cent surprising few who were expecting a more gradual approach. ECB started its rate hike cycle to rein in inflation however there is still uncertainty about the future pace of rate hikes.

The Japanese yen also managed to gain against the US dollar last week even as the Bank of Japan kept monetary policy unchanged as expected and reiterated support for accommodative monetary policy. BOJ however raised inflation forecasts indicating wariness about rising price pressure.

Trend in US dollar has been the key factor not just for gold but commodities at large and the next test for the US currency is Fed’s monetary policy decision on July 27. There has been increased debate if the Fed may continue with a 75 basis points rate hike or consider an even bigger and unprecedented 1 per cent hike to get inflation under control. The general market expectation is that the Fed may continue with a current pace of 0.75 per cent hike. If the Fed meets market expectations, it may be seen as a sign that the central bank may avoid aggressive moves to support the economy. The recent correction in the dollar shows that we are already moving in that direction however if the Fed shows any signs of slowing down we may see further losses in the US currency which may support commodities at large.

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