Fundamental Forecast for Gold:Neutral
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Gold prices are lower for a second consecutive week with the precious metal down 1.8% to trade at 1142 ahead of the New York close on Friday. The decline marks the largest weekly loss in nine with prices falling to three week lows after the Federal Reserve left the door open for a 2015 rate hike.
The FOMC interest rate decision on Wednesday weighed heavily on bullion with prices reversing sharply off the weekly highs to post the largest single-day range since October 2nd (5th largest of the year). A more upbeat assessment of the economy alongside easing concerns over the macroeconomic backdrop fueled a rally in the greenback that saw the Dow Jones FXCM U.S. Dollar Index rally to fresh 6-month highs as interest rate expectations were adjusted. Markets are now factoring in a 50% chance for a 25-basis point hike in December, up from 37% the previous week. As the likelihood for higher rates increase, the appeal of gold -a non-interest bearing asset- diminishes.
Looking forward to next week, traders will be closely eyeing the U.S. economic docket with ISM and Factory Orders among the items of interest ahead of Friday’s employment report. October non-farm payrolls are expected to rise by 182K with consensus estimates calling for the unemployment rate to downtick to 5.0%. As we’ve noted over the past few months, more attention is being lent to the labor force participation rate which fell to its lowest levels in nearly 40-years (October 1977) last month at 62.4%. Contractions in the labor force have continued to put artificial downside pressure on the headline unemployment figures and weaker print here could offset a stronger NFP release. However, with Fed suggesting a December rate hike may still be in the cards, look for stronger data to continue to weigh on gold as investors turn on the precious metal in favor of the higher yielding dollar.
From a technical standpoint, gold looks to close out the month just above confluence support at 1137- a region defined by the October 2nd outside reversal-day close, the 61.8% retracement of the monthly range and the lower median-line parallel of a formation dating back to the yearly low. A break below this level targets the 2014 low at 1130 backed by the 61.8% retracement of the advance off the yearly low at 1117. Initial resistance stands at the 10/28 reversal-day close at 1155 with a breach above 1171 needed to shift the broader focus back to the topside targeting the 1197/98.
Bottom line: we’re closing the week / month just above support within the confines of an upward sloping median-line structure extending off the 2015 low. We’ll be looking for a reaction off this mark heading into the September opening range to offer guidance here but the risk remains for a near-term rebound early next week while above 1137.