The precious gold momentarily dipped below the $2000 key psychological level yesterday and hit 5-week lows, after Fed policymakers pushed back on the idea of aggressive rate reductions in 2024, exacerbating the need for solid evidence before altering substantially the monetary policy path of the central bank.
Furthermore, the rebound and temporary sustenance of bond yields above the 4% level alongside, the relative strengthening of the greenback, dampens the shine of the precious metal and caps its upside potential, despite escalating tensions in the Middle East.
In this report, we aim to shed light on the catalysts driving the precious metal’s price, assess its future outlook, and conclude with a technical analysis.
Fed policymakers’ remarks
At a speech yesterday, Fed Governor Waller stressed the importance of deploying future monetary policy decisions with precaution, abiding by the ‘data dependent’ approach that fellow policymakers have vowed over the past month and stated, “when the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully”.
This statement once again highlighted the divergence of outlooks between the central bank and market participants, who still maintain their convictions, albeit with diminishing resolve, that policy makers will vote and implement 6 rate reductions in 2024, trimming a total of 150bps from the current 5.50% feds fund rate. The Governor added, “with economic activity and labour markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.”
This comment practically alluded to the approach that his fellow Fed predecessors undertook back in 1970’s, where they prematurely declared victory over inflation and chose to abruptly return to easing measures, only to find out later down the line, that inflationary pressures reignited, forcing them to pivot back to tightening to get it back under control, costing them, their credibility and the US economy, excess unwarranted harm.
His ‘reluctant‘ stance towards slashing rates at the same pace as what the market anticipates, lead to extension of this week’s rally of yields in bond markets and the probabilities for a 25 basis points of rate cut in March tempered, easing from the 66% level earlier this week to 53%, showcasing a ‘change of mind’ from money markets participants, who appear to react accordingly by adjusting their assessments based on incoming data.
Strong retail sales weighed further on the precious
Another factor contributing to the rise of yields were the decent consumption results of the US, with the latest retail sales figure posting an upside surprise. More specifically the month-on-month retail sales figure topped estimates and rose to 0.6% in December, above the 0.4% expectation and 0.3% result of the prior month, reflecting the increase of demand by consumers during the festivity period, but ultimately broadcasted US consumers’ resilience, who continue to spend voraciously amidst a high interest rate environment.
Next points of interest for traders therefore will be today’s updates on the housing front, alongside tomorrow’s preliminary University of Michigan leading indicators for the month of January, providing updates on consumer sentiment, current conditions and inflation expectations fronts.
Gold Technical Analysis
XAUUSD H4 Chart
- Support: 2005 (S1), 1975 (S2), 1940 (S3)
- Resistance: 2060 (R1), 2090 (R2), 2115 (R3)
Looking at XAUUSD (Gold) Daily Chart we observe that the precious gold has been having trouble forming a new higher high since the start of 2024 and yesterday’s slide and breakdown below the lower bound of the symmetrical triangle may be foretelling that a move to the downside may be imminent. We currently hold a sideways bias for the commodity, expecting its price fluctuating within the 2005 (S1) and 2060 (R1) bounds, however, shall we see a definitive breakdown below the 2000 key psychological level with negative sentiment flooding the gold market, that would force us to quickly shift our bias to bearish.
The formation of sequential lower highs (see points B and D) alongside the cross over of the MACD line below the Signal line according to the MACD indicator below our daily chart, indicate that the bulls’ efficacy is wearing out and bears could take the initiative at any moment and drive prices lower. Again however, we must stress the importance of a definitive move to the south to validate our views, alongside the cross of the MACD line below the zero line and the steepening and sloping of the RSI line, pointing clearly towards the 30 oversold boundary.
Should the bears find enough resolve, we may see the definitive break below the $2005 (S1) support level, the test and break of the 1975 (S2) support level and possibly under extreme Gold market condition the move near the $1940 (S3) support base in due time. Should on the other hand, the bulls take the initiative, we may see the precious traversing through the aforementioned consolidation area, challenge and break the $2060 (R1) resistance level and close in the $2090 (R2) resistance barrier.
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