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Post-FOMC Gold Price Rally Unravels Amid Less-Dovish Fed Rhetoric

Post-FOMC Gold Price Rally Unravels Amid Less-Dovish Fed Rhetoric

David Song, Strategist

Gold Price Talking Points

The price of gold appears to be carving a head-and-shoulders formation as the precious metal gives back the advance from earlier this week, and recent developments in the Relative Strength Index (RSI) warn of a larger correction as the oscillator continues to track the bearish trend carried over from June.

Post-FOMC Gold Price Rally Unravels Amid Less-Dovish Fed Rhetoric

The price of gold snaps the series of higher highs and lows following the Federal Open Market Committee (FOMC) interest rate decision, and the precious metal may face a larger pullback over the coming days as there seems to be a growing divide at the Federal Reserve.

Fresh remarks from Chicago Fed President Charles Evans suggest the central bank will retain the current policy at the next meeting on October 30 as the 2019-voting member on the FOMC insists that the central bank is “in a good place in terms of the rate setting” after delivering back-to-back rate cuts.

Mr. Evans went onto say that the reduction in the benchmark interest rate may “generate a bit of overshooting for our inflation objective over the forecast horizon,” with the Fed official largely revealing that “I did not have another rate cut” penciled into the interest rate forecast as he anticipates price growth to reach 2.2%.

Image of Fed Fund futures

The growing divide at the FOMC may push the central bank to the sidelines even though Fed Fund futures reflect a greater than 50% chance for another 25bp reduction on October 30, and the central bank may revert to a wait-and-see approach over the remainder of the year as Chairman Jerome Powell insists that “the future course of monetary policy will depend on how the economy evolves.”

With that said, the less-dovish rhetoric coming out of the Federal Reserve appears to be sapping the appeal of gold, but falling Treasury yields along with the inverting US yield curve are likely to keep gold prices afloat amid the threat of a policy error.

However, recent price action warns of a larger pullback as the precious metal snaps the series of higher highs and lows carried over from the previous week, with the Relative Strength Index (RSI) still tracking the bearish formation from June.

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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 continues to track the downward trend from June, with recent price action raising the risk for a head-and-shoulders top.
  • In turn, the lack of momentum to hold above the Fibonacci overlap around $1509 (61.8% retracement) to $1517 (78.6% expansion) may push gold prices back towards $1488 (61.8% expansion), with the next area of interest coming in around $1468 (50% 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.

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