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FOMC Rate Hike Next Week Keeps Gold Traders on the Edge

Will gold prices fall or rise when the Fed hikes rates? That is the one question looming on traders’ minds as the clock ticks closer to next week’s big event.

After posting strong gains, for the most part, this year, gaining over 26% at one point, the precious metal gave up over half the gains in a matter of four weeks, in a surprise move. Many experts argued ahead of the U.S. elections that a Trump victory would be bad for the markets and predicted that gold prices would rise to $1400 an ounce. Investors had other things in mind as equities rallied and gold prices fell.

Gold prices Ytd returns – 2016 (Source: MarketInsider)

Gold prices down for 4-consecutive weeks since the November elections

Gold prices have been falling steadily since the November 8 – 9 U.S. elections with the initial spike to $1340 quickly fading away. Since then, gold prices remained under pressure on renewed optimism that President-elect Trump’s fiscal spending plans will boost inflation expectations and push inflation closer to the Fed’s target rate of 2%.

The economic data from the U.S. has also been largely positive with the second revised estimates showing the quarterly GDP growth at 3.2%, higher than the initial estimates. The latest unemployment report showed the unemployment rate at 4.6%, although the average hourly earnings declined by 0.1%. The broadly positive economic data has all but confirmed the market expectations that the Federal Reserve will be pushing the short term rates higher by another 25 basis points. This comes nearly a year after the first rate hike in December 2015.

The CME Futures Group 30-day fed funds probability is currently assigning an implied probability of above 94%. For gold prices, the recent week over week declines is an indication of market participants pricing in this probability, with whatever reaction coming after the Fed decision likely to be knee-jerk.

But ahead of next week’s FOMC meeting, today’s ECB monetary policy meeting will also see gold prices react. The median estimates from the economists show that the European central bank is likely to announce the expansion of its QE purchases at today’s meeting. This view gains even more strength after Monday’s referendum results from Italy where voters rejected calls for constitutional reforms.

The Italian banking sector continues to remain under pressure as bankers are running out of options from private sector funds. Italy’s banking sector includes Monte Dei Paschi, the world’s oldest bank which is likely to seek state bailout this week. The market reaction to this has been calm so far.

Gold – Technical Outlook

Gold futures contracts for February month managed to lift off from fresh yearly lows of $1160 this week, just $10 shy of the psychological $1150 support level.

A weekly close above $1182.6 could mark a doji close, the first in nearly four weeks and it could signal a near-term pause to the 4-week decline. Given that price trades at support, the bias would then shift to the upside, towards the price level of $1255, which previously held out as support for a brief four weeks before giving up into the November U.S. election week.

Gold Futures, February delivery: Price at 1160 support

This price level is therefore very likely to be re-targeted to establish resistance level, which could happen over the coming two weeks period.

While it is still too early to speculate on further price forecasts, in the near term, gold prices are likely to settle within the range of $1250 – $1270 resistance and potentially revisit the $1160 – $1150 support level. Further direction is likely to be established only on a breach of either of these two levels.

Traders are also better off to watch the weekly Commitment of Traders report on gold futures as managed money has been steadily reducing their long exposures.


Thursday, 08 Dec, 2016 / 8:33

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