Gold Price Talking Points:
- Gold prices are catching a bid as USD-weakness is showing after a soft batch of housing data was released this morning.
- The FOMC rate decision is now two weeks away and expectations are high for the Fed’s first rate cut in over a decade. Perhaps more pressing, what will the Fed say about the remainder of the year? Will this cut be a one-off, or the start of a larger trend; the latter of which could keep Gold prices pushing higher for a while.
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Gold Breaks Out – but Can Bulls Retain Control?
Gold prices are breaking out of the bull pennant formation looked at coming into this week, pointing to the fact that investors are gearing up for a dovish outlay from the Federal Reserve at the bank’s rate decision in two weeks. While the Fed has been fairly clear in their shift, cutting expectations for 2019 from two hikes at last December’s meeting, down to zero in March and then eventually forecasting a cut in June, a large amount of divergence remains between FOMC expectations and that showing in rates markets. Rates markets are looking at a 59.7% chance of at least three rate cuts by the end of the year. The Fed, at this point, has forecast one, and markets are currently showing a 100% probability of a cut taking place in July.
The bigger question is what happens after the July rate cut? Will the Fed keep the door open for more, signaling this move as the start of a trend of softening? Or, will the Fed pitch this as a ‘one-off’ adjustment after over-tightening last year, re-opening the door for tighter policy in 2020 and beyond as the effort of ‘normalization’ continues.
At this point, Gold markets remain bid as a continuation of the theme that started in June, just as Fed-speak had started to grow more dovish. The support area around 1400 on the Gold chart that was looked at last Thursday has now held two different support inflections; most recently this morning ahead of the current topside breakout.
Gold Price Two-Hour Chart
Chart prepared by James Stanley
Gold’s Bullish Breakout
This morning’s move is at least partially driven by some soft housing data released out of the US earlier this morning, which helped to prod another push of USD-weakness. Soft data out of the US alludes to the potential for even softer policy out of the Fed in the remainder of this year, so in the two weeks leading up to the July FOMC rate announcement, that theme could stay center-stage. The bigger questions is whether buyers will be able to push prices up to fresh six-year-highs, re-testing the zone of resistance that had come into play in late-June as prices were throttling-higher. It’s a big zone of resistance, as there’s both the late-2013 swing-high and the 50% marker of the 2012-2015 major move in Gold prices.
Gold Weekly Price Chart
Chart prepared by James Stanley
While that resistance zone looked at above may well be taken out in 2019 trade, the key question to ask is whether now is the time? It could be difficult to project profit targets too far beyond this area that’s already proven rather rigid, catching a number of resistance inflections in late-June and early-July; and this could constrain potential around profit targets. If traders are looking at stops below today’s low around 1400, then the $20+ risk outlay required to enter the position would need to see a fresh six-year-high to offer a one-to-one risk-reward ratio. That may not be attractive enough to take on the risk of chasing the move at this point.
A couple of different alternatives remain: Traders can look for a pullback to another potential support level, such as around 1415 which is the 14.4% retracement of that same major move. Support showing there could open the door for short-term plays with tighter stops around that level/area of support. Or, for traders that want to remain aggressively bullish on this theme, breakout potential remains from last week’s high up to the early-July high. There’s a little more than $10 distance between those two values, and if the target is met in short-order, stops could be adjusted to breakeven while the remainder of the position can be held with topside breakout potential.
Gold Two Hour Price Chart
Chart prepared by James Stanley
Gold Price – Bigger Picture
Taking a step back and looking deeper into this scenario around the Fed, and there could be scope for a larger pullback in this theme. Gold prices ramped-up on the expectation for a dovish flip at the Fed, and it does look like a rate cut will happen in two weeks. But – going back to what was discussed at the opening of this article, is that rate cut going to be more of a ‘one off’ event after the bank over-tightened last year? Or, is this going to be the start of a new trend of softening out of the Fed?
At this point, the Fed appears to be in the one-off camp. After seven hikes in the prior two years, the FOMC looks reticent to employ a full-scale reversal of strategy. This could produce the ‘rate cut rally’ paradigm in the US Dollar at the July FOMC rate decision, which could spur another round of risk aversion through global equity markets. This could also create a deeper pullback in Gold until the bank is prepared to make a grander shift into a looser monetary backdrop.
As discussed over the past couple of weeks, there are a couple of areas of prior resistance that remain of interest for longer-term support. Neither has yet come into play after the recent breakout, but if this scenario plays out around the Fed in two weeks, matters could change quickly. The nearest of those longer-term zones runs around the 1375 level that had come into play as the late-2013 swing-high. This zone is confluent with the 38.2% Fibonacci retracement of the recent major move. A bit deeper is another zone of interest, around the 1357.50 level that functioned as the 2017 swing high; and that’s confluent with the 50% marker of the same recent major move.
Gold Price Weekly Chart
Chart prepared by James Stanley
To read more:
Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts have a section for each major currency, and we also offer a plethora of resources on Gold or USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
