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Gold to Shine on Downbeat FOMC; Dot-Plot Remains Key

Gold to Shine on Downbeat FOMC; Dot-Plot Remains Key

Fundamental Forecast for Gold : Neutral

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Gold prices were traded lower this week with the precious metal off just 0.70% to trade at 1293 ahead of the New York close on Friday. Price action was largely range bound after the yellow metal broke out of a multi-week triangle consolidation pattern the previous week and although we’re likely to get some more pullback, the broader outlook for gold remains weighted to the topside.

Key U.S. event risk picks up next week with retail sales, the consumer price index (CPI) and industrial production data on tap ahead of Wednesday’s highly anticipated FOMC interest rate decision. Consensus estimates are calling for softer reads on all three data points (save core CPI which is expected t hold steady at 2.2% y/y) and continued weakness on the U.S. data front could further delay the central bank’s normalization process- which would be supportive of gold.

The Fed rate decision will be central focus next week with markets largely expecting no change in the stance of monetary policy. Fed Fund Futures are factoring a 96% chance the central bank will sit pat next week as concerns over growth and continued / renewed easing measures from global central banks weigh on prospects for Fed normalizations. Keep in mind that we will also be getting the updated quarterly projections as they pertain to growth, inflation & employment with special emphasis to be placed on the all-important dot plot.

Last time around, the plot showed a median expectation that interest rates will reach 1.25% in 2016 – We’ll be looking for a change in these dot plots with our base case scenario calling for a marked move lower in both the mean and median estimates. Remember that we came into 2016 with expectations the Fed will hike rates four times (now an extremely unlikely scenario) and if the dot plot shows a meaningful reduction in the committee’s expectations for higher rates, look for gold to remain on firm footing as investors seek alternative stores of wealth amid continued central bank easing.

Gold Weekly

From a technical standpoint, gold looks to be marking a weekly doji after stretching into a fresh yearly high of 1284. Heading into the FOMC next week, the long-side is vulnerable for a pullback but the broader trade remains constructive while above slope support extending off the July low. Key near-term topside resistance objectives stand at the 2015 high-week close at 1239 backed by the 2014 high-week reversal close at 1334. A break sub-1151/55 would be needed to reassert the broader short-trend in bullion.

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

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Gold 2-Hour

Last week we noted that gold prices had failed at a BIG region of resistance at the “confluence of the 78.6% retracement of the 2015 range, the broader 23.6% retracement of the decline off the 2011 record highs and basic trendline resistance extending off the late-2013 high at 1251/52.” Gold has continued to consolidate below this level with prices carving out a triangle formation just below this key resistance. Note that Friday’s low came in at the confluence of the 100% extension extending off the weekly, triangle support and former basic trendline resistance (turned support) extending off the monthly high at 1211.

We’ll be looking for a break of this consolidation structure as we continue to trade into the apex with a topside breach ultimately favored. Interim resistance stands at the 2016 high-day close at 1246 backed by the weekly high at 1253 & yearly high at 1263. A break below today’s low risks more significant losses for gold with such a scenario targeting the 1.618% extension & 2/15 low at 1190/91 and the broader 100% extension off the monthly high at 1180.

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.