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Gold Price Forecast: RSI Foreshadows Change in Behavior

Gold Price Forecast: RSI Foreshadows Change in Behavior

2019-12-18 06:00:00
David Song, Currency Strategist
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Gold Price Talking Points

The price of gold trades in a very tight range even though the US and China agree on a trade deal, but recent developments in the Relative Strength Index (RSI) foreshadows a potential change in market behavior as the oscillator breaks out of the bearish formation from earlier this year.

Gold Price Forecast: RSI Foreshadows Change in Behavior

The price of gold is little changed after the Office of the United States Trade Representative (USTR) revealed that the Trump administration “will be maintaining 25 percent tariffs on approximately $250 billion of Chinese imports, along with 7.5 percent tariffs on approximately $120 billion of Chinese imports.”

The lack of detail surrounding the Phase One trade deal may keep gold prices in a narrow range as China Foreign Ministry Spokesperson Geng Shuang states that the “two sides still need to go through necessary procedures including legal reviewing and translation proofreading” before signing the agreement.

Nevertheless, easing tensions between the US and China may encourage the Federal Reserve to retain a wait-and-see approach at the next interest rate decision on January 29 as Chairman Jerome Powell and Co. insist that the “economic outlook remains a favorable one despite global developments and ongoing risks.”

In fact, the update to the Summary of Economic Projections (SEP) indicates the Federal Open Market Committee (FOMC) will stick to the sidelines for the foreseeable future as the dot-plot shows the benchmark interest rate sitting in its current threshold of 1.50% to 1.75% throughout 2020.

However, the FOMC may reestablish its rate easing cycle as US President Donald Trump tweets that it “would be sooo great if the Fed would further lower interest rates,” and the central bank could be forced to alter the forward guidance as the administration initiatesa process to assess increasing the tariff rates and subjecting additional EU products to the tariffs.”

Image of Fed Fund futures

The ongoing shift in US trade policy may push the FOMC to further insulate the economy in 2020, with Fed Fund futures reflecting budding expectations for a June rate cutas Chairman Powell warns that “if developments emerge that cause a material reassessment of our outlook, we would respond accordingly.”

In turn, Fed officials may change their tune over the coming months, and speculation for lower interest rates along with the weakening outlook for global growth may keep gold prices afloat as market participants look for an alternative to fiat-currencies.

Moreover, the reaction to the former-resistance zone around $1447 (38.2% expansion) to $1457 (100% expansion) helps to rule out the threat of a Head-and-Shoulders formation as the region appears to be acting as support.

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Gold Price Daily Chart

Image of gold price 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, with the precious metal trading to a fresh yearly-high ($1557) in September.
  • At the same time, the reaction to the Fibonacci overlap around $1447 (38.2% expansion) to $1457 (100% expansion) helps to rule out the threat of a Head-and-Shoulders formation as the former-resistance zone appears to be acting as support.
  • Recent developments in the RSI foreshadows a potential change in market behavior as the oscillator breaks out of the bearish formation from earlier this year.
  • However, gold appears to be stuck in the November range, with a move above $1489 (23.6% retracement) bringing last month’s high ($1516) on the radar.
  • Need a break/close above the $1509 (61.8% retracement) to $1517 (78.6% expansion) region to bring the topside targets on the radar, with the first hurdle coming in around $1554 (100% expansion), which largely lines up with the yearly-high ($1557).

For more in-depth analysis, check out the 4Q 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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