Gold seems to be creating the right shoulder of the bearish head-and-shoulders pattern and could drop below the neckline support
confirming a bearish reversal if the Fed sounds less dovish-than-expected.
The yellow metal is currently trading at $1,301, having clocked a high and low of $1,306 and $1,294 earlier today.
The 4-hour chart shows the metal's attempt to re-enter the flag has failed. So, the bearish view put forward by the flag breakdown,
confirmed yesterday, stands reinforced.
As a result, prices could drop to $1,281 (flag breakdown target as per the measured move method), completing the right shoulder of the
head-and-shoulders (H&S) pattern on the daily chart.
Acceptance below $1,281 would confirm H&S breakdown – bullish-to-bearish trend change – and open up downside toward $1,216 (target as per the measured move method).
That target looks far fetched as of writing but could become achievable if the Federal Reserve sounds less dovish-than-expected.
The US central bank is widely expected to keep rates unchanged and signal reduced inclination to hike rates by lowering the projected path on interest rates to one hike in 2019 and one more in 2020.
That would still be somewhat less dovish (or bit hawkish) than the market view of an early 2020 rate cut. The real hawkish surprise, however, would be Fed acknowledging the recent improvement in the risk sentiment and announcing that the excess reserves will continue to drop after the end of the quantitative tightening program (balance sheet normalization).
In that case, the dollar will likely pick up a strong bid, sending the safe haven yellow metal well below the head-and-shoulders neckline of $1,281.
Gold, however, could close next week above the recent high of $1,346 if the Fed's dot plot for 2020 shows no rate hike as opposed to expectations of a single rate hike.
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