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Divided FOMC to Boost Gold as Hedging Tool Against Fiat Currencies

Divided FOMC to Boost Gold as Hedging Tool Against Fiat Currencies

David Song,
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Gold Price Talking Points

The price of gold slipped to a fresh monthly-low ($1483) as the Federal Reserve took steps to “help keep the U.S. economy strong,” but the risks surrounding the global economy may keep the precious metal afloat as Chairman Jerome Powell and Co. project a lower trajectory for the benchmark interest rate.

Divided FOMC to Boost Gold as Hedging Tool Against Fiat Currencies

The reaction to the Fed’s 25bp rate cut raises the risk for a larger pullback as gold struggles to retain the range-bound price action from earlier this week, and it seems as though the Federal Open Market Committee (FOMC) is in no rush to reverse the four rate-hikes from 2018 as Chairman Powell insists that “the baseline outlook remains favorable.”

Image of Fed interest rate forecast

The comments suggest the FOMC will revert to wait-and-see approach at the next meeting on October 30 after providing “insurance against ongoing risks,” but the adjustments to the Summary of Economic Projections (SEP) foreshadow a more accommodative stance as a number of Fed officials see the benchmark interest rate around 1.50% to 1.75% ahead of 2020.

However, there appears to be a growing dissent within the FOMC as St. Louis Fed President James Bullard favored a 50bp rate cut at this month’s meeting, while Kansas City Fed President Esther George and Boston Fed President Eric Rosengren voted in favor of keeping the benchmark interest rate on hold.

The widening divide may heighten the appeal of gold as it raises the risk for a policy error, and market participants may continue to hedge against fiat currencies as President Donald Trump tweets “Jay Powell and the Federal Reserve fail again.”

With that said, falling interest rates along with the inverting US yield curve are likely to keep gold prices afloat, but recent price action raises the risk for a larger pullback as the precious metal struggles to preserve the range-bound price action from earlier this week.

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Gold Price Daily Chart

Image of gold daily chart

Source: Trading View

  • Keep in mind, the broader outlook for gold prices remain constructive as both price and the Relative Strength Index (RSI) clear the bearish trends from earlier this year.
  • Moreover, gold has broken out of a near-term holding pattern following the failed attempt to close below the $1402 (78.6% expansion) region, with gold prices trading to a fresh yearly-high ($1557) in September.
  • However, recent developments in the RSI warns of a near-term correction in gold as the oscillator fails to preserve the upward trend carried over from April.
  • In turn, the failed attempt to close above $1554 (100% expansion) raises the risk for a larger pullback, with lack of momentum to hold above the $1509 (61.8% retracement) to $1517 (78.6% expansion) region bringing the downside targets on the radar.
  • Another close below $1488 (61.8% expansion) may spur a more meaningful run at $1467 (50% expansion), with the next area of interest coming in around $1447 (38.2% expansion) to $1457 (100% expansion).

For more in-depth analysis, check out the 3Q 2019 Forecast for Gold

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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