Fundamental Forecast for Gold:Neutral
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Gold prices are weaker this week with the precious metal down 1.3% to trade at 1161 ahead of the New York close on Friday- its largest weekly decline since August. Strength in the greenback alongside hints for more easing out of the ECB and an interest rate in China, Fueled a volatile session for bullion heading into the close of the week. Although prices may have further downside to go near-term, the broader outlook remains constructive above a key support threshold just lower.
The European Central Bank rate decision on Wednesday fueled a massive sell-off in euro crosses after President Mario Draghi cited willingness to further expand easing measures as growing concerns over deteriorating conditions in emerging markets & finical market volatility continue to threaten the recovery in Europe. Just one day later, the People’s Bank of China (PBoC) cut interest rates by 25 basis points and lowered the reserve requirement ratio (RRR) by 50 basis points. The surprise move suggests that officials continue to see downside risks for the worlds second largest economy – a topic now mentioned by both the ECB & the Fed.
The U.S. economic docket is jam packed next week with New Home Sales, Durable Goods and the advanced read on U.S. 3Q GDP among the heavy hitters. The main event however will be the FOMC interest rate decision on Wednesday. With central banks around the world upping their verbal rhetoric and taking actions make policy even more accommodative, the Fed has little room for error. Fed-fund futures now show a 37% chance for a rate hike by December and if the committee cites a more dovish tone, look for expectations for higher rates to get kicked out even further- a benefit for gold.
Last week we noted that gold was at risk near-term after rallying more than 7% off the October lows with the prices, “vulnerable for move lower heading into next week but the medium-term outlook remains constructive while above the October 2nd low/reversal-day close at 1138. Bottom line: looking for a pullback before stretching into new highs.”
Gold reversed off the 52-week moving average at 1180 early this week with a subsequent three-day decline testing ascending slope support on Friday at ~1163. Key weekly support stands just lower at the 1151/55 region (medium-term bullish invalidation) – a break below would shift the focus lower in gold targeting confluence support down towards 1132. Topside targets are unchanged at 1189 with a key resistance confluence seen higher at 1197/98. Note that the daily momentum signature is also approaching a longer-term support trigger off the August low – look for a reaction at that mark to offer guidance heading into FOMC.