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Gold Snaps 3-Week Losing Streak on FOMC- To Trade or Fade?

Gold Snaps 3-Week Losing Streak on FOMC- To Trade or Fade?

Michael Boutros, Strategist

Gold Snaps 3-Week Losing Streak on FOMC- To Trade or Fade?

Gold_Snaps_3-Week_Losing_Streak_on_FOMC-_To_Trade_or_Fade_body_Picture_1.png, Gold Snaps 3-Week Losing Streak on FOMC- To Trade or Fade?

Fundamental Forecast for Gold: Bearish

Gold prices snapped a three week losing streak with the precious metal advancing just 0.52% despite massive $83 swing after the Federal Reserve decided to maintain its super-accommodative stance on monetary policy. Bullion was trading at $1332 ahead of the New York close on Friday after reaching as high as $1375 in the previous session. Is the Fed’s decision to hold off on tapering enough to reverse the decline seen off the August highs? Near-term price action is suggesting that the answer is ‘NO’.

Wednesday’s FOMC meeting took markets by surprise as the central bank voted against tapering the $85 Billion monthly asset purchases program. Although traders were broadly anticipating a taper of 10B-15B amid a slow but steady recovery in the labor markets, the Fed wanted “more evidence” that the economy is on a sustainable path before embarking on an exit strategy. In the subsequent press conference, Federal Reserve Chairman Ben Bernanke cited that a first step to begin tapering was still possible this year but that the central bank has been and will remain “data dependent.”

Indeed in the days that followed remarks made by lone dissenter Esther George, the head of the Kansas City Fed and a voting member this year, suggested that the taper may yet be at hand. George, widely regarded as the most hawkish of the voting members, expressed disappointment with the Fed’s action this week, citing that it created ‘confusion’ and a ‘disconnect’ with her decision to dissent largely based on imbalances regarding the risk of further easing. St Louis Fed President James Bullard also noted that the decision to maintain policy, “was a close call on Wednesday,” suggesting that within the committee there may be an inclination to take steps as soon as October if, “there’s an opportunity to do so.” The comments suggest that expectations for the inevitable QE taper may not have been pushed out as far with topside advances in gold likely to be limited on this account.

The third and final read of the US 2Q GDP print is released on Thursday and represents the most significant data-print next week. Consensus estimates are calling for a third upward revision to 2.6% following a surprising revision higher to 2.5% from just 1.7% last month. Should the data top expectations, look for gold prices to remain under pressure as the case for an October/December taper begins to take root. Beyond the scope of the economic docket, market participants will be lending a keen ear to an array of speeches from FOMC policy makers with Atlanta Fed President Dennis Lockhart, Dallas President Richard Fisher, and Cleveland President Sandra Pianalto all on scheduled to speak next week. New York Fed President William Dudley and Boston Fed President Eric Rosengren, both voting members this year, are also on tap next week and will likely offer further volatility as markets attempt to price in the timing of the central bank’s exit strategy. Look for gold prices to react with the risk remaining to the downside on more clarity with regards to the taper.

From a technical standpoint, gold remains below the bearish invalidation level noted last week at $1373. As such, our bias remains weighted to the downside with Friday’s sell-off taking bullion just shy of near-term support at $1323 (61.8% retracement off the September low). It’s too soon to tell if the correction off the lows is complete and the recent pullback may yet inspire another test of the highs with a breach above $1380 eyeing resistance targets at $1417 and $1448. Weakness beyond $1306 (50$ retrace off the 2013 low) puts the broader downtrend in focus targeting support the $1276- $1287 support region and a Fibonacci confluence at $1234. Note that the September opening range was clearly bearish suggests a close closer to the lows for the month with daily RSI maintaining a sub-50 position into the close of the week. -MB

---Written by Michael Boutros, Currency Strategist with DailyFX

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