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Gold Prices to Face Central Bank Volatility as Sentiment Stretches

Gold Prices to Face Central Bank Volatility as Sentiment Stretches

Michael Boutros,

Fundamental Forecast for Gold:Neutral

Gold prices softer this week with the precious metal off 0.17% to trade at 1318 ahead of the New York close on Friday. Heading into the holiday weekend the near-term risk remains for further losses before making a more significant low in early September trade.

Non-Farm Payroll figures released on Friday showed the U.S. economy gained 151K jobs in the month of August, slightly missing expectations for a print of 180K. Although we did see an upward revision to last month’s already stellar number, the unemployment rate held steady at 4.9% (expected 0.1% drop) with wage inflation figures also coming in well below consensus estimates. Interest rate expectations remain broadly unchanged with Fed Fund Futures continuing to price the first material expectations for a rate hike to be in December.

The initial reaction saw gold rally into near-term resistance at the July low-day reversal-close before pulling back sharply in early U.S. trade. With a quiet week for U.S. data, traders will be closely eyeing central bank rate decision from the RBA, ECB & BoC. Price action around these events can often times offer surges in volatility and a washout lower in price on one of these releases could offer favorable long-entries.

A summary of the DailyFX Speculative Sentiment Index (SSI) shows traders are net long Gold- the ratio stands at 1.70 (63% of traders are long)- bearish reading. Long positions out-paced shorts on building open interest this week with long exposure 44.7% above levels seen last week while shorts are up just 11.1%. Although the SSI does keep the focus lower, it’s important to note that the last time SSI approached these extremes (high then was 2.14) was back in May just days before prices bottomed.

Gold Daily

The broader outlook remains unchanged from last week and from a technical standpoint, heading into September trade seasonal tendencies favor strength after next week so we’ll be looking for a low as the monthly opening range takes shape. Price turned higher this week from confluence support where the 50-line of the descending median-line formation converges on the May high and the 100% extension at 1303. Friday’s rally failed just ahead of the July low-day reversal close at 1330 and the risk remains lower near-term while below this mark.

A break lower targets more significant structural support next week around 1296 backed by 1287- both areas of interest for possible exhaustion / long-entries. A breach above the upper median-line parallel is needed to validate a breakout targeting the high-day close at 1355 & 1380. Bottom line: looking lower to get long heading into September trade.

Looking longer-term?

Click here to review DailyFX’s 3Q Gold Projections

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

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