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Gold Holds Range Despite Fed Rate Hike- Shorts at Risk Above 1047

Gold Holds Range Despite Fed Rate Hike- Shorts at Risk Above 1047

2015-12-19 00:30:00
Michael Boutros, Strategist
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Gold Holds Range Despite Fed Rate Hike- Shorts at Risk Above 1047Gold Holds Range Despite Fed Rate Hike- Shorts at Risk Above 1047

Fundamental Forecast for the Yuan: Neutral

Gold prices are down for the second consecutive week with the precious metal off by 0.84% to trade at 1065 ahead of the New York close on Friday. A historic week saw the Federal Reserve move to the raise the benchmark interest rate for the first time since 2006, fueling a rally in the USDOLLAR which tested the 2015 close high on the heels of the release. Gold saw the largest single day drop in five months on Thursday but pared a bulk of the declines into the close of the week.

The FOMC’s decision to hike rates marks the end of the seven-year zero interest rate policy (ZIRP) and the beginning of the central bank’s normalizations cycle. Rising interest rates increase the holding costs for gold, which does not pay a dividend, and as such is likely to keep the metal under pressure. With that in mind, markets have already been pricing in this hike and moving forward the focus will be on both the timing & scope of future rate hikes. For gold, this alleviates some of the immediate bearishness heading into the start of the 2016 calendar year.

Looking to the week ahead, traders will be closely eyeing the third and final read on 3Q GDP with consensus estimates calling for a downward revision to an annualized 1.9%, down from the previous 2.1% print. With the FOMC continuing to suggest that the committee remains ‘data dependent’, look for US economic data to drive price action in gold as investors adjust interest rate expectations. We’ll also be closely eyeing the greenback after the Dow Jones FXCM U.S. Dollar Index failed to breach the 2015 high-day close at 12204.

From a technical standpoint, gold completed a 100% extension from the decline off the monthly high at 1047 before reversing sharply on Friday. Ongoing momentum divergence on both daily & weekly timeframes suggests that prices may be at risk for a near-term correction higher while above this region. Prices have continued to hold within confines of the December opening range (1046-1088) and we’ll be looking for a break of this region heading into next week. A breach targets key resistance & near-term bearish invalidation at 1098-1101. A move sub-1047 keeps the short-side bias in focus targeting more significant support at the 975/80 Fibonacci confluence. Bottom line: look for a break of the monthly opening range to offer guidance on our near-term directional bias with broader outlook weighted to the downside sub-1101.

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