Despite starting the week on a positive note, gold closed with losses. Market analyst Eren Şengezer says a dovish Fed surprise could put pressure on US yields and help gold gain traction. According to the analyst, the short-term technical outlook reveals a lack of buyer interest.
Gold started the week on a positive note
cryptocoin.comThe Wall Street Journal claimed that the Fed plans to hold a debate in December about whether to signal its plans for a smaller rate hike. After that, the dollar struggled to find demand on Monday. Additionally, data released by S&P Global late Monday showed that business activity in the private sector continued to contract at an accelerating pace in early October. The data revealed that the Composite PMI fell to 47.3 from 49.5 in September. In turn, it has managed to keep the golden ground.
The US Federal Housing Finance Agency announced on Tuesday that home prices fell at a stronger-than-expected rate in August. This did not allow the dollar to gain momentum again. It also helped gold maintain its balance. Also, the Conference Board’s Consumer Confidence Index fell from 107.8 in September to 102.5 in October, missing the market expectation of 105.9. Dollar sales accelerated amid falling US Treasury bond yields on Wednesday. The yellow metal rallied to a two-week high of $1,675. Meanwhile, the Bank of Canada’s dovish 50bps rate hike caused global yields to plummet.
Data in the second half of the week pushed gold down
On Thursday, the ECB raised key interest rates by 75 bps, as expected. At the press conference, ECB President Christine Lagarde declined to raise any further interest rates in December. It also did not share any details about a possible quantitative tightening (QT) move. This caused the euro to come under heavy selling pressure. The dollar caught some of the exits from the euro. This made it difficult for gold to maintain its bullish momentum.
Additionally, the US Bureau of Economic Analysis (BEA) initial forecast revealed that the US economy grew 2.6% year-on-year in the third quarter, compared to market consensus of 2.4%. The benchmark 10-year US Treasury bond yield rose above 4% with optimistic Gross Domestic Product (GDP) data. Thus, gold came under bearish pressure again and closed the week in the red below $1,650.
The BEA announced on Friday that inflation in the US, as measured by the Personal Consumption Expenditure (PCE) Price Index, remained unchanged at 6.2% year-on-year in September. The Core PCE Price Index, the Fed’s preferred gauge of inflation, rose to 5.1% from 4.9% in August. Thus, it came in higher than analysts’ forecast of 5.2%. Despite relatively soft inflation data, US T-bond yields rose. This forced the precious metal to remain under bearish pressure.
Event of the week: Fed policy rate decision
ISM will release its October Manufacturing PMI report on Tuesday. The market reaction to S&P Global’s PMI surveys shows that disappointing data is likely to put pressure on the dollar. However, before the Fed’s policy announcements on Wednesday, the impact of this report on the dollar will likely be short-lived, according to the analyst.
Markets expect the Fed to raise the interest rate by 75 bps to the range of 3.75%-4% after its November policy meeting. FOMC policymakers have repeatedly said that they will base their policy decisions on incoming data and will not provide any forward-looking guidance. However, investors will be looking for clues for a smaller increase in December.
Currently, markets are pricing in a 51.5% probability that the Fed will raise the policy rate by a total of 125 basis points by the end of 2022, according to CME Group’s FedWatch Tool. Market positions suggest the dollar has more margin to the downside if investors are convinced the Fed will decide on a 50bps increase in December. In this scenario, gold is likely to gain bullish momentum alongside falling US yields. Also, the analyst says it could trigger a risk rally as markets begin pricing at the top of the Fed’s hawkishness. Accordingly, he notes that this is likely to give additional weight to the dollar. Alternatively, the analyst makes the following assessment:
On the other hand, risk traders are likely to be disappointed if the Fed does not show any policy change intentions and takes refuge in the dollar. This will likely be a significant bearish trend for gold. Thus, it will open the door to a long-term decline.
US NFP data coming Friday
On Thursday, ISM Services PMI will be on the US economic list. However, it’s possible that market participants paid little or no attention to the Fed’s policy decisions. Finally, the U.S. Bureau of Labor Statistics will release its October employment report on Friday. Investors forecast Nonfarm Employment (NFP) to rise 200,000 after a better-than-expected increase of 263,000 in September. The market’s reaction to the last few NFP data is clear with strong data helping the dollar outperform its rivals. The opposite is also true. A similar reaction is likely ahead of the weekend, according to the analyst.
Gold technical outlook and gold sentiment survey
Market analyst Eren Şengezer analyzes the technical outlook of gold as follows. Gold tested this level twice earlier this week. However, it failed to make a daily close above the 20-day SMA. Additionally, the Relative Strength Index (RSI) indicator on the daily chart has turned south. It then encountered resistance around 50 and declined to 40. This shows that sellers want to keep control of gold’s movement.
On the downside, $1,620 (end point of a six-month downtrend) stands as critical support. A drop below this level is likely to trigger a technical drop. This is also likely to cause gold to drop to $1,600 and $1,575. If the yellow metal closes above $1,670 (20-day SMA) daily and manages to stabilize, $1,680 (50-day SMA), $1,700 (psychological level) and $1,720 (100-period SMA, Fibonacci 23.6% retracement) can target.
The average one-week target sits at $1,660 on the FXStreet Gold Forecast Survey. Thus, it points to a bullish outlook in the near term. The one-month outlook shows that half of the experts surveyed are bullish versus 40% bearish. So it paints a mixed picture.
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