Gold outlook: Fed decision and trade talks on the menu

Since our last report Gold’s price has moved lower. In today’s report we are to discuss mainly fundamental issues and we intend to end the report with a technical analysis of Gold’s daily chart.

Fed decision this week

The Fed’s interest rate decision is due out tomorrow. The majority of market participants are currently anticipating the bank to remain on hold with FFF currently implying a 96.9% probability for such a scenario to materialize. As such, attention may turn to the bank’s accompanying statement and Fed Chair Powell’s press conference following the bank’s decision. In particular, market participants may be looking for any hints from policymakers that the bank is prepared to cut rates in the near future, which could weigh on the dollar whilst aiding gold’s price given their inverse relationship with one another. Yet, should the bank showcase a willingness to maintain its restrictive monetary policy approach it may have the opposite effect and thus aid the dollar whilst weighing on gold’s price. Furthermore, we must note that the Fed has been under immense pressure from the US Government and in particular President Trump, who has been vocal in his opinion that the Fed should cut rates and thus despite the 96.9% probability implied by FFF that the Fed may remain on hold, a rate cut possibility may still exist. In our view, we would not be surprised to see dissent amongst policymakers and a possible dovish undertone emerging within the bank’s accompanying statement, such as implying that once the dust settles from the administration’s trade agenda, the bank could possibly consider cutting rates.

Inflation data, GDP rates and the state of the US employment market

It’s going to be an incredibly volatile week for traders considering the amount and significance of the financial releases stemming from the US. We begin with the release of the US preliminary GDP rate for Q2 which is due to be released in tomorrow’s American session and notably prior to the Fed’s interest rate decision. The current expectations by economists are for the GDP rate to showcase an expansion of the economy at 2.4% and could thus aid the dollar whilst weighing on gold’s price as recession fears continue to subside. Furthermore, the US inflation print and in particular the PCE rates for June are due out on Thursday and are expected to showcase an acceleration of inflationary pressures in the US economy on a headline level from 2.3% to 2.5% whereas the Core PCE rate is expected to remain steady at 2.7%. Nonetheless, the possible uptick in inflationary pressures could increase pressure on the Fed to remain on hold which could aid the dollar whilst weighing on gold’s price. Yet, the US Employment data for July which is due out on Friday, is expected to showcase a loosening labour market when looking at the expected NFP figure and the anticipated uptick in the unemployment rate. Therefore, given that the Fed’s dual mandate may be at odds with inflation remaining elevated whilst the labour market loosens, market worries may resurface about the state of the US economy, which could aid gold’s price given its status as a safe haven asset.

Trade deals and talks with China to ease market worries?

Since our report last week, the US and the EU have agreed to trade deal terms, effectively ending market worries about a possible trade war between the US and EU come August 1st. In turn the reduced risk of a global trade war occurring may have weighed on gold’s price. Furthermore, as trade discussions between the US and China proceed, worries about a trade war between China and the US may continue to ease. Overall, the possible conclusion of the US’s volatile trade agenda may allow for some normality to return to the markets which in turn, could weigh on gold’s price as the risks posed to the global economy subside. In our view, the China-US talks which are currently ongoing are what we are currently monitoring, as Trump
may be eager to declare “victory”, but with China possibly looking to control the narrative the situation may not be that simple.

Technical analysis

XAU/USD daily chart

Support: 3240 (S1), 3115 (S2), 2980 (S3).

Resistance: 3385 (R1), 3500 (R2), 3790 (R3).

Gold’s price appears to be moving in a sideways fashion after breaking below our support now turned to resistance at the 3385 (R1) level. We opt for sideways bias for the commodity’s price and supporting our case is the RSI indicator below our chart which currently registers a figure near 50, which tends to imply a neutral market sentiment in addition to the clear break below our upwards moving trendline which was incepted on the 30th of June. For our sideways bias to be maintained we would require gold’s price to remain confined between the 3240 (S1) support level and the 3385 (R1) resistance line. On the other hand, for a bearish outlook we would require a clear break below our 3240 (S1) support level with the next possible target for the bears being the 3115 (S2) support line. Lastly, for a bullish outlook we would require a clear break above our 3385 (R1) resistance line with the next possible target for the bulls being the 3500 (R2) resistance ceiling.