What to watch: Gold capped at $1238?

After breaking through a bearish trendline at the beginning of last week, Gold benefited from some USD profit-taking and managed to climb its way back up the charts. However, the yellow metal found resistance at $1238 preventing entry to $1240 and current technicals indicate this could be a psychological ceiling in the current Gold market. The $1238 level also represents a 50.0 fib level from the previous high ($1344) to the previous low ($1131) and the metal finding resistance at the 50.0 fib level twice last week does suggest the Fibonacci levels are in play. If this is the case, technical traders would likely be bearish below $1238 and looking at a potential entry opportunity if Gold manages to break through this resistance.

Following the US Non-Farm Payroll at the beginning of the month, US economic data has been lighter in volume. However, this week sees a far higher quantity of economic data released and any increased demand for the USD will really pressure metals. Economic releases during the beginning of the week such as Industrial Production, Manufacturing Production and Building Permits should provide the markets with a clearer indicator of US economic health as we conclude the year. However, what the markets are really waiting for is Wednesday’s annualised inflation data for November, alongside the FOMC Interest Rate Decision.

Following the lower-than-expected PPI figure on Friday, there is some increased anxiety that the US inflation levels will also decline in accordance to the dramatic drop in oil prices. This remains a threat, but a potential downturn in inflation levels should only have a short-term impact on the US economy. In the longer term, consumers will now have far greater disposable income to spend and this should improve longer-term inflation expectations. The main downside risk for the USD is the FOMC Decision, where any dovish comment on inflation expectations from the Federal Reserve would likely encourage USD profit-taking and inspire bullish moves in Gold back towards $1238. So far, the Federal Reserve has been fairly quiet regarding the decline in oil prices but traders should watch out for any potential dovish comments.

In my opinion, I do not think the Federal Reserve will attempt to talk down the USD this week because they are likely already keeping a close eye on the rapid declines in the equity markets over the week. If the Federal Reserve encourages investors to close USD positions, we are looking at potential chaos in the equity markets to conclude the year, and I do not think the Federal Reserve would want to inspire this when confidence in the global economy is already low. The message from the Federal Reserve is likely to focus more around the theme that the US economy is continuing to progress, with more of the same being required as the overall tone.

So where does this leave Gold? As long as USD demand remains consistent over the next one or two days, support levels for the metal can be found at $1204 and $1197. If the $1197 area breaks, further support can be found around $1190. It would require an unexpected hawkish comment to move Gold any lower than the psychological $1180 level.

Elsewhere, the week ahead is pretty hectic for the Pound and we are expecting some increased volatility. The annualised inflation data for November (Tuesday), UK Jobless Claims (Wednesday) and BoE Minutes (Wednesday) can all be classified as high-risk and looking at the Pound already slipping by over 80 pips against the USD on Monday, expectations for the data are slightly dovish. The real cause for concern around the UK economy at the moment is the projection that UK inflation will slip below an annualised 1% within the next six months and this is deterring investors from purchasing the Pound. The BoE Minutes are just expected to be more of the same, where we find out there remains two dissenters within the MPC but other voters’ strong views on weak price pressures are swaying them away from joining the dissenters.

The UK Jobless Claims data will provide an opportunity for the bulls to recover any losses, but it will require an impressive average wage growth figure to give the bulls any momentum right now. Other than that, any upside moves for the Pound are going to be motivated by USD weakness. As mentioned above, the Cable has already slipped by 80 pips at the beginning of the week and if the pair continues its tumble, support can be found at 1.5625 and 1.5586.