Following speculation that fundamental data in the United States was too shaky for the Federal Reserve to consider raising interest rates further in the upcoming meetings, the dollar was sent tumbling as hawkishness quickly turned to dovishness.Poor data related to GDP and employment have further reduced the appeal from certain investors’ perspectives, adding to recent momentum higher in gold.However, a burst of optimism since the weekend reopening has sent the dollar higher as the Yen finally depreciates modestly and fundamental announcements for the US remain sparse after the nonfarm payroll figure released last Friday.Although gold prices had risen to the highest level in over a year as of last week, the momentum has shifted rapidly, snuffing out the rally just as quickly as it began.

Dollar Power

Although there has been little in the way of positive macroeconomic developments over the last few sessions, with relatively few announcements set to be delivered this week, the dollar may continue to gain on the back of less negativity.One area that is fueling sustained upside was the earlier release of the JOLTs job openings print of 5.757 open jobs for the month of March, a favorite metric for the US Federal Reserve in its decision-making process.Besides printing above forecasts of 5.431 million jobs, the prior figure was revised higher to 5.608 million a factor that could fuel further gains throughout the session.Nevertheless, even with the temporary respite from a slew of negative economic readings, the probability of a policy adjustment in the coming months remains exceeding low, with Fed Funds futures only pricing in a 7.50% probability of rates rising an additional 25 basis points in June.

Gold in general has been highly sensitive to developments in rate policy in the United States and also inflation.However, any further pickup in inflation will prove a net negative for gold in dollar-denominated terms despite the historical application of precious metals as an inflationary hedge.Should inflation rise from current levels, it could compel the Federal Reserve to raise rates sooner to tame inflationary pressures, thereby fueling further gains in the US dollar on the back of a stronger probability of a prolonged tightening cycle.At this point, gold is much more a function of forward looking uncertainty and lack of confidence in central banking than an effective hedge against inflation.Therefore the dollar should be the central focus of any future gold trading, however, there are several factors that are contributing to recent weakness in the currency.

For one, the rapid strengthening in the Yen is hurting the dollar basket in general complemented in large part by the rally in the Euro and Pound.Should the Yen begin to weaken once more thanks to a combination of jawboning from officials and direct intervention in exchange-rates, the dollar might get a further boost which will pressure gold even lower near-term.Additionally, because the dollar is sensitive to monetary policy conditions, any data that suggests room to tighten rates further might be taken as a buy signal, pushing appreciation in the currency.While these factors may buoy the dollar temporarily, a further divergence in interest rates amongst advanced economies is the most likely wedge that will drive gold prices lower over the medium-term unless hawkishness is derailed by poor performance of economic fundamentals.

Consolidation Ahead

From a technical perspective, after hitting resistance at $1301.00, XAUUSD is once again regrouping and likely to enter a consolidation formation.On the upside, this resistance level has proven formidable as evidenced by the test back in January of 2015 at which point gold prices failed to rise above the critical point.However, now that gold prices are entering a triangle consolidation, should fundamental conditions that would support higher interest rates in the US fail to materialize, gold could breakout to the upside, testing $1301.00 once more.Any breakout will depend on a candlestick close above or below the trendlines to be further confirmed by an uptick in volume and momentum.In the near-term however, consolidation could limit potential opportunities, as risks remain constant while reward potential shrinks during the narrowing range of price action.

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Supporting further upside is the moving averages with both the 50 and 200-day moving averages trending higher.The crossover back in February is also serving as confirmation of the reversal higher in price action after years of a bear market in prices.Nevertheless, the partial gap down that emerged has a slightly bearish bent, indicating that any rally higher in prices should be faded near-term.However, in the case that the gap between the weekly close and weekly open is filled in with prices rising above the level, it could indicate a resumption of bullish momentum higher in the precious metal.

Prepare for the breakout

Should the Federal Reserve signal that it is not interested in tightening rates any further after the first trial balloon last December, it could indicate a renewed round of weakness ahead for the US dollar, propelling gold prices significantly higher.However, on the backdrop of the global economy, the United States is starting to look like the least dirty shirt, especially considering the ability to actually consider raising rates unlike many other advanced economies solely focused on accommodating policy further.Although the Federal Reserve is not scheduled to meet until June, the data will be the critical focus over the coming weeks when it comes to understanding the directional momentum of gold prices. Another round of softness in the dollar will undoubtedly translate to further upside in precious metals, particularly gold.