FX Trading Idea Gold

Technical View
Price has gone on a rally since early May 2019, from a low of $1266, to reach a high of $1556 on September 4th.  Since the high, price has been in a correction. There were 2 tails in the second half of November  2019. The first tail was a result of FOMC’s meeting minutes. The minutes said the US central bank rate was “ well calibrated” which was taken to mean rates were right and no plans to change it in the near future. Price of Gold dropped but recovered. On the second tail, a good NFP, which meant that rates were unlikely to be cut, push price of Gold lower but price managed to bounce back. Below $1445, the base could be strong even though Gold is in a downtrend trend channel. It also implied that Gold was in a correction. Price has also stayed above the Fibonacci 62% correction point of the rally. This is again another sign of a bullish trend and a correction in progress. Price has settled into a range of $1445 to $1484, ahead of this week market events.

Fundamental View
We looked at the technical picture of Gold. There are 3 important events in this week. We will look into the possible impact of each event and the longer trend of Gold.

Event #1 FOMC meeting on 10th and 11th of December
In the previous FOMC meeting and in minutes released in November, Fed had hinted that rates were “well calibrated”. As such, for this coming FOMC meeting, market participants are expecting the Federal Reserve to stay on hold and expecting no changes in interest rate. In October when the Fed cut interest rate by 25basis points, price of Gold moved $22 on 31st Oct 2019. If price were to fall by $22 on a hold decision, price could reach a low of $1444 based on current price of $1464. Price should stay above $1445 within the trend channel.

Event #2 UK Election on 12th Dec 2019

In the week leading to the election, the Conservative Party extended its lead over the Labour Party to 14 percentage points, up from 9 percentage point a week ago, in opinion polls. The British pound hit a seven-month high amid growing confidence of a Conservative Party victory and majority in parliament, which would end the political paralysis on Brexit. In such a case, an area of uncertainty would be removed and price of Gold should be lower. However, price of Gold may not drop that much as this could have already been factored in the current price just as Sterling has strengthened in anticipation of an impending Brexit. We expect price to stay within the trend channel and the impact of a Conservative Party UK election victory on Gold to be limited.

However should there be a major change in opinion which leads to a hung parliament, uncertainty would increase and Gold could move higher by $25 in order to break above the trend channel at $1485 but we do not anticipate a move beyond $1519 for this scenario. At the moment, this possibility is also considered low.

Event #3 Trade Tariffs Deadline 15th Dec 2019
If a phase one deal cannot be reached between China and the U.S., according to White House economic advisor Larry Kudlow, tariffs will be implemented. If tariffs are implemented, uncertainty will increase on global economies. Gold could break out of the trend channel and head towards $1519. If this level breaks, the next resistance will be at $1556, which was the high before the correction.

If there is a phase one trade deal, uncertainty will decrease, price of Gold will drop. Price is likely to first test the trend channel base at $1411.

Another scenario would be a delay in implementing tariffs to give negotiators from both sides more time to complete a phase one deal. If this happen price volatility is likely to increase but trend direction is likely to move sideways.

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