Gold started the new week on a bullish note and hit a two-week high near $1,730 on Monday. However, for the rest of the week, gold prices came under heavy downward pressure. Thus, it slumped to a multi-year low below $1,660 before rebounding ahead of the weekend. According to market analyst Eren Sengezer, the technical outlook for gold shows that the bearish trend remains unchanged despite Friday’s gains. Meanwhile, the Fed’s policy decision next week will be the main driver of the market.
What happened in the markets last week?
Gold prices fell after US CPI
Amid a positive shift in risk sentiment, the dollar struggled to find demand on Monday. Therefore, the US Dollar Index (DXY) opened with a bearish bias. But during American trading hours, gold wiped out some of its daily gains as US Treasury yields gained momentum. The 10-year Treasury bill auction resulted in a higher yield of 3.33% from 2.75% in the previous auction. Thus, it helped increase returns.
On Tuesday, the US Bureau of Labor Statistics reported that the US Consumer Price Index (CPI) fell to 8.3% year-on-year in August from 8.5% in July. This data came in stronger than the market expectation of 8.1%. More importantly, the annual Core CPI rose to 6.3% from 5.9% in July, reducing volatile food and energy prices. With the initial market reaction to hot inflation data, hawkish Fed bets have dominated financial markets. The dollar strengthened against its main rivals. In addition, the 10-year US Treasury yield rose to 3.4%, the highest level since mid-June. By contrast, gold prices lost more than 1% on a daily basis on Tuesday.
Gold prices fell below $1,700 on Thursday
The dollar rally weakened on Wednesday. However, gold failed to show a recovery. The only data from the US was the annual Producer Price Index (PPI). PPI fell from 9.8% in July to 8.7% in August. Wall Street’s main indexes rose modestly after Tuesday’s CPI-driven sell-off. However, the 10-year US T-bill yield managed to hold around 3.4%, not allowing gold to rise.
The dollar continued to outperform its rivals amid the bad mood in the market. Gold prices fell below $1,700 on Thursday. After mixed macroeconomic data from the US, US yields began to rise. This pushed gold below the key $1,680 support, triggering a technical sell-off. Gold tumbled about 2% on Thursday. It also touched $1,654 early Friday, its weakest level since April 2020, before making a technical correction.
Inflation expectations fell, reducing gold losses
The US Census Bureau’s monthly publication showed that US Retail Sales rose 0.3% month-on-month in August. Additionally, the U.S. Department of Labor reported that there were 213,000 initial jobless claims in the week ending Sept. 10, up from 218,000 the previous week. On a negative note, the Philadelphia Fed Manufacturing Index fell to -9.9 in September from 6.2 in August, clearly missing the market’s expectation of 2.8.
On Friday, the University of Michigan’s September Consumer Sentiment Survey showed consumers’ one-year inflation expectation dropped to 4.6%. It also revealed that the five-year inflation expectation fell from 2.9% to 2.8%. The 10-year US T-bond rate turned negative the day after this report. After that, gold gained momentum and rallied to $1,680.
What will be on the agenda next week?
Wednesday Fed to announce rate decision
cryptocoin.comAs you follow, on Wednesday, the Fed will announce its interest rate decision. It will also publish the updated Summary of Insights, the Point chart. According to the CME Group FedWatch Tool, markets are currently pricing in a 100 basis point (bps) rate increase with a 20% probability. The market expects the Fed to raise the policy rate by 75 basis points to the range of 3%-3.25%. This suggests that US T-bond yields will decline if the dollar loses altitude.
In June, the dot chart showed that the terminal rate in 2023 was expected to be 3.8%. The new dot chart is likely to reveal that the policy rate will likely rise to 4% by the end of the year. According to the analyst, the potential negative impact of a 75 basis point rate hike on the dollar is likely to be short-lived if the terminal rate is projected to rise to 4.5% next year and remain there before starting to decline in 2024.
“Markets have already given up on expectations of Fed easing”
Market participants will also be watching closely the press conference of FOMC Chairman Jerome Powell. If Powell raises concerns about recession risks in 2023, the dollar is likely to struggle to gather strength. Any comments on easing supply chain pressures or easing conditions in the labor market are also likely to put pressure on the dollar, according to the analyst. However, Powell will likely reassure markets that they are determined to fight inflation. He will also point out that they haven’t seen convincing signs that inflation has peaked. The analyst makes the following assessment:
The recent rally of the dollar indicates that we may see a ‘buy the rumor sell the fact’ action after the Fed’s policy statements. The Fed is likely to remain on an aggressive tightening path. There isn’t much room for a hawkish surprise at this point. Markets have already given up on expectations that the Fed may begin to ease policy in the second half of the year.
However, the analyst says it is not easy for investors to bet against the dollar, given the relatively healthy state of the US economy. So even if the dollar weakens in the near term following the Fed event, a significant dovish shift in the policy outlook will likely be required for the currency to steadily depreciate against its major rivals. On Friday, S&P Global will release preliminary Manufacturing and Services PMI reports for the USA. According to the analyst, stronger data than forecasts are likely to damage gold. If the opposite happens, the market reaction to PMI numbers will likely be straightforward.
Gold prices technical outlook and gold sentiment survey
Market analyst Eren Sengezer analyzes the technical outlook of gold as follows. Gold touched the lower border of the descending regression channel from March on Friday. Later, the Relative Strength Index (RSI) indicator on the daily chart returned from 50. This shows that gold is in a correction phase while maintaining its bearish trend.
On the upside, $1,680 stands as the next hurdle to $1,700. A daily close above the second level is likely to attract additional buyers. Ayroca is likely to open the door for a long recovery at $1,720 towards the upper end of the regression channel where the 20-day SMA is also located. Temporary support holds $1,665 ahead of $1,654 and $1,640.
The FXStreet Forecast survey points to an overwhelmingly bearish bias in the short term. Accordingly, the one-week average target is around $1,650. Also, the one-month outlook paints a similar picture, with an average target of $1,643.
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