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Gold Talking Points

Gold gives back the advance following the Federal Reserve meeting as fresh data prints coming out of the U.S. economy undermine the sudden shift in central bank rhetoric, and the precious metal stands at risk for a larger pullback as the Relative Strength Index (RSI) falls back from overbought territory.

Image of daily change for major financial markets

Gold Risks Larger Pullback as RSI Falls Back From Overbought Territory

Image of daily change for gold prices

The recent advance in gold appears to have stalled after testing the May-high ($1326), and the price for bullion may continue to consolidate ahead of the townhall with Chairman Jerome Powell as the 304K expansion in U.S. Non-Farm Payrolls (NFP) puts pressure on the Federal Reserve to further normalize monetary policy in 2019.

Keep in mind, the latest projections from Fed officials continue to show a longer-run interest rate of 2.75% to 3.00%, and the Federal Open Market Committee (FOMC) may find it difficult to endorse a dovish outlook as the U.S. economy shows little to no signs of an imminent recession.

Image of fed interest rate forecast

It remains to be seen if the Federal Reserve will conclude the hiking-cycle ahead of schedule as the central bank drops the hawkish forward-guidance for monetary policy, and Chairman Powell& Co. may continue to warn that the ‘the normalization of the size of the portfolio will be completed sooner, and with a larger balance sheet, than in previous estimates’ amid the weakening outlook for the global economy. The comments suggest the FOMC will ultimately taper the $50B/month in quantitative tightening (QT), and the shift in monetary policy should continue to boost the appeal of gold as it drags on U.S. Treasury yields.

With that said, dovish comments from Chairman Powell may continue to heighten the appeal of gold, but recent price action raises the risk for a larger pullback as the precious metal fails to extend the bullish series from the previous week.

Waning expectations for higher U.S. interest rates should continue to heighten the appeal of bullion especially as the FOMC emphasizes that ‘growth has slowed in some major foreign economies,’ and gold may exhibit a more bullish behavior over the near-term as it extends the upward trend carried over from late-2018. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

Gold Daily Chart

Image of gold daily chart
  • The broader outlook for gold remains constructive as both price and the Relative Strength Index (RSI) track the bullish trends from late-2018, but the lack of momentum to break/close above the $1328 (50% expansion) to $1329 (50% expansion) region raises the risk for a near-term pullback especially as the momentum indicator falls back from overbought territory.
  • As a result, the former-resistance zone around $1298 (23.6% retracement) to $1302 (50% retracement) is back on the radar, with a break/close below the stated region raising the risk for a move back towards $1288 (23.6% expansion).
  • Next downside region of interest comes in around $1279 (38.2% retracement) followed by $1260 (23.6% expansion).

For more in-depth analysis, check out the 1Q 2019 Forecast for Gold

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.