US dollar index breaks higher, triggering reversal warnings for gold and copper

US dollar index surges to two-month highs on bullish economic data
Gold, copper reverse hard on dollar strength, delivering reversal signals
Market focus will be on US core PCE inflation report for May released on Friday
It may show continued disinflationary forces, adding to case for Fed rate cuts

One swallow does not a summer make

Gold and copper were looking good until late Friday, bouncing strongly following recent weakness, the former talking out key levels in the process. Then along came the latest US Composite PMI from S&P Global which suggested the vast bulk of information we’ve received recently is providing an inaccurate picture on the health of the US economy.

While rates markets largely ignored the reported strength in report, FX markets did the opposite, sending the US dollar index surging to the highest level since early May. That flowed through to commodity markets, delivering a key outside day for gold and bearish engulfing candle for copper, pointing to the possibility of continued selling in the early parts of this week.

DXY breaks to multi-month highs

You can see the US dollar index (DXY) move on the daily, breaking above 105.742 on Friday, a level that had repelled previous advances in early May and mid-June. With MACD and RSI trending higher, momentum is with the bulls from a technical perspective, putting a potential retest of resistance at 106.50 in play.

But I’m not convinced it will get there.

When the DXY last visited those levels, it was on the back of a big unwind in Fed rate cut bets in 2024, the exact opposite to what we’re seeing right now. And while a large part of this move has been driven by heightened uncertainty over French elections that begin this weekend, that’s now arguably already in the price. Throw in the threat of intervention from the Bank of Japan to support the yen against the US dollar, and likely focus on ebbing US inflationary pressures in the week ahead with the release of the US core PCE deflator, and the backdrop does not point to easy upside for dollar bulls.

Given that assessment, it raises question marks over the price signals received last Friday in gold and copper markets.

Gold delivers key reversal signal

The dramatic reversal in gold is easy to see, with a bullish break above the 50-day moving average and downtrend from the record highs on Thursday reversing hard late Friday, delivering a key outside day for bullion. While that points to downside risks, looking back over recent moves in gold shows there’s been numerous reversal signals recently that have ended up going nowhere. It’s been a messy tape.

Should prices dip towards $2300, there’s a decent chance we may see bids emerge considering the price action earlier in June. There’s also no definitive bearish signal from momentum indicators yet, adding extra need for caution. Support may be found at $2286 and again at $2266. On the topside, the 50-day moving average and Friday’s high of $2369 are the first levels to watch.

Copper reverses hard and remains choppy

Like gold, COMEX copper futures delivered a reversal signal on Friday, printing a bearish engulfing candle having failed to clear the 50-day moving average. But the reversal came on the back of tepid volumes. RSI has also diverged from price recently, printing higher lows which is another signal suggesting now is not the time to get too bearish.

The price bounced strongly after testing support at $4.396 on two occasions last week, making that the first downside level to watch. Below, bids may be found below $4.25 and $4.164. On the topside, the 50-day moving average, $4.6875 and $4.746 are possible upside targets for bulls.

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.