- SWFX sentiment is flat (59% bullish), as traders attempt to evaluate the Fed's statement
- Outlook for gold is negative in the long run; the bears are aiming at five-year low (1,044)
- Sideways trading is currently projected by aggregate daily technical indicators
- Economic events to watch in the next 24 hours: German IFO Business Climate (Dec); Italian Trade Balance (Oct); US Current Account (Q3), Unemployment Claims (Dec 11), Natural Gas Reserves (Dec 11) and Philadelphia Fed Manufacturing Index (Dec); UK Retail Sales (Nov); Bank of Japan Interest Rate Decision, Monetary Policy Statement and Press Conference; New Zealand ANZ Business Confidence (Dec)
Gold fell on Thursday, trading choppy as the US Dollar surged after the Fed announced its first rate hike in almost a decade, signalling its growing confidence in the world's number one economy. The Fed raised its target for the federal funds rate, the rate at which banks lend money to one another, from 0% to 0.25%. The modest increase is unlikely to have a significant impact on the American economy. Yet, the move is extremely important, as it is widely seen as the first step in a longer sequence of rate hikes over the next couple of years.
After seven years of maintaining the federal funds rate near zero, the Fed announced its first rate hike in almost a decade, signalling its growing confidence in the world's number one economy. The Fed raised its target for the federal funds rate, the rate at which banks lend money to one another, from 0% to 0.25%. The modest increase is unlikely to have a significant impact on the American economy. Yet, the move is extremely important, as it is widely seen as the first step in a longer sequence of rate hikes over the next couple of years. By the end of next year, the US central bank expects the benchmark interest rate to climb to a median 1.375%, which implies four more 25 basis points increases over the coming 12 months. In 2017, officials are aiming to bring the policy rate up to 2.375%, which will take another four hikes. The Fed noted the world's biggest economy is growing solidly and should pick up its pace to a respectable 2.4%. Nonetheless, prominent economists argue that the US economy is still vulnerable to slower global growth and criticized the Fed's decision, particularly as there was no compelling reason like increasing inflation and a tight jobs market to justify it. However, the Fed's support for the decision was unanimous. Policy makers noted considerable improvement in the labour market and said they were "reasonably confident" in inflation climbing over the medium term to its 2% target.
British unemployment fell to pre-crisis levels in the three months through October, whereas pay growth continued to slow, bolstering the Bank of England's intention to keep interest rates ultralow. The number of people out of work dropped by 110,000 to 1.71 million between August and October. There were 31.3 million people in work, 505,000 more than a year ago. Consequently, the unemployment rate dropped to 5.2% in the quarter to October, the lowest level in nearly 10 years, whereas economists had expected the jobless rate to stay unchanged at 5.3%. However, wage growth disappointed, and a sharp drop in earnings over the reported period indicated that interest rates would remain at a record low of 0.5% for longer. Total pay growth climbed by just 2.4% in the three months to October, down from 3% in the three months to September. Bank of England Governor Mark Carney said he would like to see earnings growth above 3% a year before he would increase interest rates. Even though wages have been rising slowly from their post-crisis lows, earnings growth has remained notably below the pre-downturn levels. While regular earnings increased on average by 4% before the economic slowdown, between 2001 and 2008, the same measure of pay climbed just 1.5% on average between January 2009 and September 2015.
Upcoming fundamentals: BOJ rate decision is due Friday morning
Following the Fed Day, events planned by other central banks are expected to have a smaller scale of importance. Nonetheless, tomorrow morning the Bank of Japan will decide whether to make any changes to the present monetary policy stance. The main question is the quantitative easing programme, where the BOJ may act further and pump more stimulus into the world's third biggest economy. Market participants are waiting for no change this time, being that Japan's economy managed to avoid recession in the third quarter 2015 and policy makers continued to argue the economic growth is on track.
Gold reverses post-Fed rally on Thursday
The Dollar plunged at the expense of gold prices on Wednesday, as the Fed Chair Janet Yellen confirmed the future pace of rate hikes will be gradual. XAU/USD closed above July low around 1,072. On Thursday, however, we are observing a downside correction, which is at risk of being prolonged further. The bears are looking at the lower Bollinger band (1,058) in the short-term, while in the long run depreciation towards the 1,044 mark is possible. On top of that, gold continues to be driven down by two resistances at 1,073/74, namely the 20-day SMA and weekly pivot point.Daily chart
The one-hour chart shows the level of gold's volatility during the past 24 hours. However, it managed to keep the price within the bearish channel's boundaries. Hence, we expect more losses for the precious metal, but markets need a confirmation that the bullion is able to consolidate below an important technical level represented by 200-hour SMA at 1,071.
Hourly chart
SWFX positions unchanged after the Fed Day
On top of that, there is no broad change in sentiment in the OANDA market, where the bulls continue keeping more than seven out of every ten open positions, namely 71.79% of them. At the same time, SAXO Bank traders have become slightly more bearish on gold since yesterday and reduced their bullish share from around 68% to 64.82%.