Gold Outlook Turns Bearish On U.S. Dollar Strength
Fundamental Forecast for Gold: Bearish
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Gold fell back from a record high of $1444.95 to mark the first weekly decline since the end of January, and the short-term reversal may gather pace going into the middle of March as global investors diversify away from the bullion.
As the precious metal breaks out of the upward trending channel from back in January, prices look poised to push lower in the days ahead, and the bearish divergence in the relative strength index certainly reinforces a weakened outlook for future prices as the near-term rally tapers off ahead of $1450. In turn, the flight to safety is likely to spur increased demands for the U.S. dollar, and gold prices should trend lower throughout the remainder of the month as the rebound in the greenback gathers pace.
However, with the Federal Open Market Committee scheduled to announce its interest rate decision next week, dovish comments from the central bank could generate a bearish reaction in the reserve-currency, and gold may regain its footing following the meeting as Chairman Ben Bernanke maintains his pledge to keep borrowing costs close to zero for an ‘extended’ period of time. At the same time, the Fed may keep the door open to ease monetary policy further in 2011 in order to combat the protracted recovery in the labor market, and the rebound in the U.S. dollar could be short-lived as market participants speculate the FOMC to carry out another round of quantitative easing later this year. Nevertheless, the Fed may strike an improved outlook for the real economy as private sector activity accelerates, and the central bank may drop its dovish tone as rising energy prices raises the risk for inflation. In turn, the statement accompanying the rate decision is likely to generate increased volatility across the financial markets as investors weigh the prospects for future policy. - DS
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