If you watched the price action in the gold market last week, you probably saw that its rally was fueled by two events: the dovish Fed minutes and weak U.S. economic data. Gains were likely limited, however, because of demand of higher risk assets.
The first two events that drove yields and the dollar lower were the U.S. Federal Reserve’s interest rate decision and monetary policy statement. As widely expected, the Fed unanimously declined to raise interest rates. However, in its monetary policy statement, it laid the groundwork to begin trimming its massive $4.5 trillion bond portfolio.
“The committee expects to begin implementing its balance sheet normalization program relatively soon,” said the Fed statement. This implied the central bank is ready to begin winding down its huge stimulus program in September rather than December as previously expected.
In assessing the economy, the Federal Open Market Committee held to its assessment that “activity has been rising moderately so far this year.” On inflation, the statement removed the word “somewhat” from June’s verbiage and said simply that inflation was running “below 2 percent”. This was only a subtle tweak, but nonetheless probably means Fed officials are a little more pessimistic about reaching their mandated objectives.
On Friday, gold surged again after the dollar weakened in reaction to underwhelming U.S. economic data. U.S. Gross Domestic Product growth picked up 2.6 percent in the second quarter, in line with expectations. However, first quarter GDP was revised downward to 1.2 percent.
Forecast
Shortly before the Fed raised rates in June, December Comex gold reached a top at $1305.50. This lead to a break into $1211.10 on July 10. This created a retracement zone that traders have been watching at $1258.30 to $1269.40.
On Friday, gold settled on the strong side of this retracement zone, putting the market in a bullish position. As long as gold remains over the 50% level at $1258.30, I think investors will be comfortable with trading the long side.
Fundamentally, gold will be supported by the dovish outlook for U.S. interest rates and the gradually weakening U.S. economy. Gains will also be limited if the U.S. stock market continues to reach new all-time highs.
This being said, gold could trade sideways to higher early in the week, but if stocks continue to rise then look for the market to become range bound.
The key report this week will be Friday’s U.S. Non-Farm Payrolls report. Helping to support the Fed’s decision to raise rates has been the strong labor market. Gold prices could spike to the upside this week if the NFP report comes in below expectations.
Reference: FXEmprie
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