Gold poised for breakout as Fed halts dollar, yields rally

Gold rallied as the dollar and yields both sold off yesterday on the back of the surprisingly less hawkish comments from the Federal Reserve Chairman. The metal has started today’s session slowly, as there hasn’t yet been a significant follow-through in the dollar’s selling. Clearly some speculators are holding fire until the G20 summit is out of the way. However, we think that the dollar selling will resume and so the buck-denominated metal could break higher, possibly as early as this afternoon.

Powell’s comments weren’t misinterpreted – they were deliberate

There’s been suggestions from some market observers that Jerome Powell’s comments were misinterpreted yesterday. They argue that investors incorrectly thought that the Fed Chair said interest rates are now "just below" neutral. What he actually said was that rates are "just below the broad range of estimates of the level that would be neutral.” There’s a difference. The current interest rate range at 2.00-2.25 percent is indeed just below the broad range of estimates of 2.50-3.50 percent, but it does not necessarily mean the Fed will stop hiking once the lower range of this estimate is reached at 2.50 percent. Rates could rise, they argue, to the mid or even the higher end of that range. Is this why the dollar has rebounded today?

Technically, the above observation may be correct, but there’s no doubt in my mind that Powell was deliberately preparing the market for a pause in the once-a-quarter rate hikes in 2019. He chose his words carefully and the Fed went from being “a long way from neutral” interest rates to “just below” the level where the central bank may consider pausing, in just one month. Of course, to us, the Fed’s change in tone comes as no surprise. Our followers may recall that it was only on Tuesday – a day before the dollar’s slump – that we warned of a potential dollar correction.

Bullish breakout on the cards for golds?

The technical outlook on gold hasn’t changed much from our last report we published HERE. The fact that gold has managed to remain largely bid since hitting a low of $1160 since mid-August even though the Dollar Index went on to print news highs on the year (until its tumble yesterday) goes to show that the precious metal has outperformed some currency pairs. In part, this has been due to the fact that both the GBP/USD and EUR/USD have been undermined by ongoing political and economic uncertainties in Europe, while the recent stock market sell-off has meanwhile boosted the appeal of gold as a safe haven asset. Although gold is still contained within its existing wide range. It appears as though it wants to break above a short-term bearish trend line. If this happens, we could see some further follow-up technical buying pressure which could push the metal towards, and possibly beyond, the old resistance in the $1240 region. Meanwhile if the selling resumes, we would only turn bearish on gold if it goes on to break below our invalidation level of $1220.