Gold Price Forecast: On slippery grounds ahead of the Fed rate decision

• Gold has dropped sharply, courtesy of the upbeat US Nonfarm Payrolls data. 
• The metal appears on track to retest recent lows near $1,445 ahead of next week's FOMC rate decision. 
• Federal Reserve is expected to reiterate data dependence next week. 

Gold is on track to end the week with marginal losses and will likely remain under pressure ahead of next week’s FOMC rate decision. 

The yellow metal picked up a bid in the first half of the week gone by and clocked highs above $1,480 on Wednesday. A close above the 50-day average, however, remained elusive and prices fell back to $1,460 on Friday, possibly in response to the upbeat US non-farm payroll data and the resulting rise in the US dollar, gold’s biggest nemesis.

The data released at 12:30 GMT showed the US jobs rose at the fastest rate in 10 months in November and the jobless rate fell back to 3.5%. Notably, Nonfarm Payrolls rose by 266,000 last month, with manufacturing recovering all the 43,000 jobs lost in October.

The US 10-year yield surged more than five basis points to 1.864% to hit the highest level in two weeks following the jobs data. The Dollar Index, which tracks the value of the greenback against majors, rose from 97.42 to 97.84. 

Friday’s data validated the Fed’s recent decision to pause the easing cycle that started in July when the borrowing cost was reduced for the first time since 2008. 

Focus on the Fed

The central bank is widely expected to keep interest rates unchanged next week and reiterate data dependency. Moreover, with equities at record highs, the yield curve having re-steepened and recent data suggesting no risk of recession, the Fed has little reason to sound dovish. 

As a result, gold is unlikely to see any pre-Fed relief. In fact, prices could drop below the November low of $1,445 if there is no negative newsflow on the trade front and the China trade and inflation data show that the world's second-largest economy is beginning to gather traction. 

“Judging from a rebound in manufacturing PMIs last month, things have stopped getting worse. We anticipate more evidence of this in the forthcoming data supporting our view of GDP growth gaining some traction in this quarter,” according to ING’s Asia week ahead note. 

Gold will likely put on a good show in the second half of the next week if the Fed sounds dovish, reviving bets for additional easing in 2020. Currently, traders are not pricing rate cut by the Fed before 2021. That’s compared with the second half of 2020 before Friday’s data, according to Bloomberg. 

The Fed rate decision is due on Dec. 11. Meanwhile, China is set to publish the trade data for November on Dec. 8 and the Consumer Price Index and the Producer Price Index for November on Dec. 10.

Apart from the Fed rate decision and China data, the pair may also take cues from the UK elections due on Dec. 12, the ECB rate decision and the US inflation and retail sales data. 

Technical outlook

Gold’s rejection at the 50-day MA above $1,480 on Wednesday and the subsequent drop to $1,460 has added credence to the bearish cross of the 50- and 100-week averages confirmed on Dec. 2. 

The 14-week relative strength index is reporting bearish conditions with a below-50 print and the weekly MACD histogram is producing deeper bars below the zero line, a sign of strengthening bearish momentum. 

Further, the 5- and 10-week moving averages are trending south in favor of the bears. 

The stage looks set for a drop to November's low of $1,445. A close lower would bolster the bearish setup and expose support at $1,405 (200-day MA + 38.2% Fibonacci retracement of the rally from August 2018 low to September 2019 high. 

The short-term outlook would turn bullish if prices find acceptance above the Dec. 4 high of $1,484, invalidating the lower highs setup on the daily chart. 

Daily chart

Weekly chart

Gold Forecast Poll

The Forex Forecast Poll is a sentiment tool that highlights near- and medium-term price expectations from leading market experts. As can be seen, the market ha turned bullish on gold ahead of the next week's Fed rate decision. The yellow metal is seen falling to $1,74 next week by Dec. 14 and is seen extending gains to $1,492 over the next four weeks.

 

The path of Gold will depend on global risk tones. In a low interest, low yielding bond environment investors seeking alpha have once again been attracted to Gold. However, if phase 1 of the US-China trade deal gets passed and Phase 2 looks promising then expect Gold to lose its recent value. If the Phase 1 deal gets canceled expect immediate Gold buyers. This outlook projection numbers above assume a deal will be done. However, please note that gold buyers historically come into the market around January time for the lunar New Year. So, that is why the 30-day out-look for gold is higher than you might otherwise expect.