The Relationship Between Gold and U.S. Dollar

Will their relationship give us valuable clues about gold's future direction?

In yesterday's Quick Gold Alert, in addition to analyzing the current technical situation of gold, I took a closer look at the relationship between the yellow metal and the greenback.

What interesting did it tell me? I share the conclusions drawn with you in today’s article below. Have a nice read.

The Relationship Between Gold and U.S. Dollar - Image 1

Looking at the above chart, we see that many times in the past local peaks in U.S. currency corresponded to local lows in gold (in early Oct. 2023, on Nov. 10, 2023, on Dec. 11, 2023, and also in mid- Feb. 2024).

A similar situation could be observed with the lows in the U.S. dollar - they corresponded to the gold highs or directly preceded them. We saw such a correlation in late Nov. 2023 and in late Dec. 2023.

Will history repeat itself again?

It’s quite likely.


Because the U.S. currency reached an important short-term support area – just look at the chart below.

The Relationship Between Gold and U.S. Dollar - Image 2

On Friday, the U.S. dollar slipped to the upper border of the green supportive gap (102.15-102.50) created on Jan.15. Thanks to this drop, the currency also tested the 50% Fibonacci retracement (based on the Dec.-Feb. upward move) and the lower border of the very short-term black declining trend channel.

Despite this move, the combination of mentioned supports withstood the selling pressure and triggered a rebound before the end of the day. As a result, a pro-bullish hammer appeared on the chart, suggesting that further improvement may be just around the corner.

However, before we see such price action, the bulls will have to close a small red gap, which started Friday’s session and serves now as the nearest resistance.

What could happen if the buyers push the U.S. dollar above it?

In my opinion, we’ll likely see an increase to the next resistance – the red gap (103.25-103.32) created on Thursday, which is currently intersected by the 50-day moving average. If it is close, the way, to the 200-day moving average or even the upper border of the very short-term black declining trend channel could be open.

At this point, it is worth noting that the pro-bullish scenario for U.S. dollar is also supported by the current position of the indicators.

As you can see, the RSI has dropped to its lowest level since late Dec. 2023.

What happened then?

Such a low reading of the indicator preceded a reversal and a month-and-a-half-long move to the north. Similar situation, we could observe in the case of the CCI and the Stochastic Oscillator, which suggests that rebound may be just around the corner. Nevertheless, please keep in mind that such price action will be more likely and reliable if the indicators generate buy signals and leave their oversold areas.

What would this development mean for gold?

Considering the above-mentioned strong correlation between the yellow metal and the U.S. currency that we observed in the past, it seems more likely than not that a rebound in the greenback will translate into a correction in gold.

How low could gold if we see such price action?

In my opinion, the first downside target would be the previously broken Dec. 2023 high of $2,152.30. Nevertheless, please keep in mind that such a decline would be more likely and reliable only if bulls fail to protect the previously broken blue line (marked on the weekly chart) based on the 2023 peaks (currently at around $2,179).

Summing up, gold hit a fresh high of $2,203 on Friday but then reversed and declined, invalidating the earlier breakout above the barrier of $2,200. At the same time, the U.S. dollar reached the important support area, which together with the current position of the daily indicators and similarities to the past suggest that reversal in both cases could be just around the corner. Therefore, waiting on the sidelines and carefully observing the behavior of market participants in the area of the most important support and resistance levels seems to be the best investment decision at the moment. Stay tuned.

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See you tomorrow.

Anna Radomska