Last night I was looking at other markets for forex trade inspiration and I chanced upon gold price action and its correlation to the dollar’s performance. For those who are fairly new to the forex industry, you should know that gold and dollar prices are usually inversely correlated.
The School of Pipsology tells us that, in times of economic unrests, traders tend to dump fiat currencies like the dollar in favor of gold, which has its own intrinsic value. On the other hand, when risk aversion is not caused by Uncle Sam’s performance or there is no widespread fear in the markets, then some traders simply buy the low-yielding dollar for its safe haven appeal and make gold, a dollar-denominated commodity, cheaper.
So what were the biggest movers of gold price action last month? I was able to list three and, unsurprisingly, they all have something to do with the Greenback:
1. U.S. NFP Concerns. Gold started the month with a bang with its trip from $1,172 to $1,200 in the first few days of May alone. Aside from U.S. equities traders “selling in May and going away,” some market players also found it difficult to hold dollars ahead of the U.S. NFP report. If you remember, a weak March NFP reading and Yellen’s lack of commitment to a bias had a lot of traders scrapping their June rate hike bets.
2. Weak U.S. Data. After a lukewarm NFP reading at the start of the month, traders began looking more closely at the succeeding U.S. reports for hints on when the Fed would raise its interest rates. Unfortunately, the U.S. retail sales, PPI, consumer confidence, and manufacturing indices were missing expectations around the middle of the month. It also didn’t help risk appetite that China had cut its interest rates and that Greek officials were still butting heads with European negotiators over a possible debt deal.
3. Dollar Rally. It wasn’t until the second half of May when the dollar bulls went back to work and caused dramatic declines in gold prices. Though Fed members are still aren’t committing to any rate hike schedule, risk aversion from the euro region boosted the dollar’s safe haven appeal. The euro was hit with hints of more QE from the ECB and a possible Greek debt default, and caused significant movements in major dollar pairs such as EUR/USD and USD/JPY.