Dollar Rebound Sparks Gold Bear Pennant Warning

The US dollar has rebounded strongly over the past week, helped by rising front-end US yields following Kevin Warsh's hawkish speech at Jackson Hole. This rebound is weighing on gold, which is coiling within a bearish technical structure that warns of another potential leg lower.

The DXY index regained its mojo after twin failures beneath a support zone including the 50% retracement of the January to June bull move. It has reclaimed the 200-day moving average and the 38.2% Fib retracement of the same move, before stalling at the 100-day moving average on Monday.

The price action in DXY closely mirrors shifts in the shape of the US Fed funds futures curve between June and December this year, with tightening priced by year-end rising to 34 basis points, up from less than 25 basis points before Kevin Warsh's speech at Jackson Hole last Friday.

The correlation matrix shows a sharp increase in DXY's positive relationship with front-end US yields over the past week, particularly the two-year tenor, where the correlation has jumped to 0.87. At the same time, DXY's already strong inverse relationship with gold has strengthened further, lifting to -0.92 over the past five days.

The price action in XAU/USD resembles a bear pennant, warning of a potential resumption of the prior bearish move and retest of lower levels. Gold bulls will still be licking their wounds after Friday's lurch lower, which saw the price take out the uptrend that had been in place from before the bullish breakout in early August.