Talking Points:
- Gold prices edge higher despite upbeat ISM survey data
- Crude oil prices post largest daily decline in six months
- All eyes now on minutes from December FOMC meeting
Gold prices finished the day with a modest gain. The metal plunged as the US Dollar jumped upward alongside benchmark US Treasury yields and S&P 500 futures as better-than-expected manufacturing ISM data crossed the wires. A mere ten minutes later, the markets reversed course. Gold rallied to session highs as yields, the greenback and stock futures tumbled.
The sudden burst of risk aversion extended to crude oil prices. The WTI contract plunged alongside equities and the greenback having touched an 18-month high earlier in the day. It continued to hover near session lows into the end of day on Wall Street even as the yellow metal pared gains and USD recovered with stocks and Treasury rates.
A discrete trigger for the dramatic about-face is not readily apparent. Erratic price action is not entirely unusual as liquidity rebuilds against a backdrop of portfolio balancing in the first days of a trading year. That seems to be the most plausible explanation on offer and hints that investors would be wise to remain modest in their expectations for trend development until participation levels are rebuilt.
Looking ahead, the spotlight turns to the release of minutes from December’s FOMC meeting. Besides a broadly expected rate hike, the sit-down produced an upgrade of policymakers’ growth and employment forecasts as well as a projection of three rate hikes in 2017, up from two envisioned in September. Not surprisingly, the markets read this as hawkish.
As noted previously, Chair Yellen attempted to play down this narrative (albeit unsuccessfully), saying the average rate path envisioned by FOMC members steepened courtesy of only a few contributing officials. She also stressed that much still depended on an uncertain fiscal outlook. Alas, she was largely ignored as the view favoring a swifter tightening cycle that emerged after the US presidential election continued to hold sway.
A similar tone in the Minutes document may command attention this time around however, boosting gold. The implications for crude oil may prove negative if markets get the sense that its rosier growth forecasts are contingent on a still-murky fiscal boost championed by the incoming Trump administration. The weekly EIA inventory flow data may complicate price dynamics however.
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GOLD TECHNICAL ANALYSIS – Gold prices continue to consolidate in familiar territory. A daily close above the 23.6% Fibonacci retracement at 1166.51 targets the 1193.55-99.80 area (38.2% level, May 30 low). Alternatively, a turn back below the 14.6% Fib at 1149.85 exposes the December 15 low at 1122.81.
CRUDE OIL TECHNICAL ANALYSIS – Crude oil prices turned sharply lower, posting the largest daily decline in six months. From here, a daily close below horizontal pivot support at 51.64 exposes the 38.2% Fibonacci retracementat 49.80. Alternatively, move back above the 14.6% Fib at 53.31 targets the January 3 high at 55.21.
--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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