Dollar Rebound Triggers Bearish Gold Signals

The US dollar has staged a strong rebound over the past week, thanks in part to rising front-end Treasury yields following Kevin Warsh's hawkish speech at Jackson Hole. As a result, the dollar's inverse correlation with gold has strengthened, lifting to -0.92.

This increased correlation suggests that further dollar upside could lead to renewed downside in gold. In fact, the price action in XAU/USD is already hinting at this risk materializing, as it cools within a bearish technical structure known as a bear pennant.

The bear pennant warns of another potential leg lower for gold, with key support levels at $4,400 and $4,367. The price has been consolidating in a narrowing range since the abrupt downward move on Friday, which saw it take out the uptrend that had been in place from before the bullish breakout in early August.

The dollar's rebound is closely tied to shifts in the shape of the US Fed funds futures curve between June and December this year. Tightening priced by year-end has risen to 34 basis points, up from less than 25 basis points before Warsh's speech at Jackson Hole last Friday.