Gold, S&P 500: US dollar turning point may deliver significant upside Nov 16th 2023

USD Turning Point? Implications for Gold and the S&P 500

If Tuesday marked a significant turning point in the outlook for US inflation, interest rates, and the dollar, it could have major ramifications for assets such as gold and the S&P 500.

The US Dollar Index (DXY) plunged 1.5% earlier this week following a benign inflation report for October. While it’s important not to overinterpret a single day’s movement, declines of this magnitude in the world’s reserve currency are uncommon and often signal a broader market turning point, given that so many assets are priced in dollars.

Market Shift: Inflation to Economy

On the surface, the market appears to be shifting focus from inflation to the economy and labor market. With inflation largely under control, uncertainty grows around whether the Federal Reserve can maintain a soft economic landing. A successful soft landing will likely be required to support further upside in asset prices in the near to medium term.

Gold Benefits from a Softer Dollar

A weaker US dollar tends to benefit gold, one of the two key drivers of its price, the other being real, inflation-adjusted bond yields, which are also falling. Historical trends suggest that large dollar moves often coincide with longer bullish trends for gold and other dollar-sensitive assets.

Gold Price Analysis

Looking at gold on the daily chart, the corrective episode from above $2,000 may have run its course. The price recently bounced strongly from the 200-day moving average (DMA), breaking through resistance at $1,946.

• Momentum indicators like RSI and MACD do not yet signal a strong long trade.
• Pullbacks toward $1,946 could improve risk-reward dynamics, with stops placed just below this level or the 200DMA.
• Resistance levels: $1,980 and $2,005. A break above $2,005 could spark bulls to target record highs just under $2,100.