Gold Prices Rally Up to Pivotal Resistance Zone
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- Gold Technical Strategy: Near-term: Previously aggressively bearish leading into the rate hike, now aggressively bullish after the rate hike took place.
- The apparent takeaway being that the Fed was not hawkish enough to keep bears in control of Gold price action.
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In our last article, we were looking at aggressively bearish price action in Gold prices as we walked-in to last week’s rate hike from the Fed. And the term ‘rate hike’ is important here rather than ‘rate decision’, because the Federal Reserve had widely-telegraphed their intentions ahead of the move. As we walked into last week’s rate decision it appeared that markets had already priced-in the move (see our prior article, Gold Prices Slide Down the Slope of Despair for further explanation): Gold prices were sitting on a critical support level at $1,200, which is the 50% retracement of the ‘big picture’ move in Gold prices, taking the Bretton Woods-fix of $35/oz up to the 2011 high at $1,920.
But along with that rate hike from the Federal Reserve came a healthy dose of caution. Fed Chair Janet Yellen avoided eliciting any significant hawkish concerns around policy normalization during her press conference; and the Fed’s dot plot matrix was curiously dovish – as the bank did not increase their expectations for rate hikes going out to the end of 2018. As we had walked into that rate hike, the various iterations of Fed-speak were noticeably hawkish. Markets were likely expecting that hawkish Fed-speak to translate into stronger expectations for more aggressive interest rate hikes. When this didn’t happen, markets responded with a strong sell-off in the U.S. Dollar, and a bullish pop in Gold prices. At this point, we’ve rallied up to a huge level in the Gold market, around the $1,250 psychological level.
Chart prepared by James Stanley
So, this would appear to be another example of markets not ‘buying’ the Fed’s rate hike plans. After eight-plus years of passive accommodation, with numerous starts and stops, markets have come to expect the Fed to err on the side of caution. And given the high degree of uncertainty around the potential for fiscal policy in the United States, coupled with the uncertainty of the continued recovery in the United States; and it can make logical sense as to why that expectation has been built-in.
For those that do want to press bullish-themes in the Gold market, awaiting a break of the $1,250 level could make the prospect of additional top-side considerably more attractive. This is a big level for Gold prices, as this was the ‘Brexit swing-low’ as well as being the 50% retracement of the ‘big picture’ move; and we’ve seen numerous support/resistance inflections off of this level. Traders can let bulls drive price action beyond this resistance to highlight the potential for deeper movement, at which point this current level of resistance can be re-assigned as support in the effort of bullish continuation.
Chart prepared by James Stanley
--- Written by James Stanley, Strategist for DailyFX.com
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