Gold reverses post-Fed rally on Thursday

Source: Dukascopy Bank SA
  • 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)

© Dukascopy Bank SA
Precious metals posted a clear surge in value yesterday, as gold and silver added 1% and 2.9%, respectively. These commodities had a positive response to the Federal Reserve's crucial and historical decision to hike the target range for the Federal Funds rate by 25 bps to 0.25-0.50%. The Fed Chair Janet Yellen reaffirmed her view that further rate increases should be slow and gradual, as the regulator will remain accommodative in order to avoid any risk of a recession in the medium-term. Meanwhile, volatile Dollar had completely no impact on oil prices, which resumed slumping on Wednesday. Crude crashed by 5%, while Brent was down by around 3.5%. Such a loss materialized after the stockpiles' report showed that US energy reserves rose by 4.3 million barrels last week, although analysts expected a decrease of 0.3 million barrels. Moreover, inventory built-up was registered by other energy components including petroleum.

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.

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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
© Dukascopy Bank SA

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
© Dukascopy Bank SA

SWFX positions unchanged after the Fed Day

A decision of the world's biggest central bank has been unable to move the SWFX market sentiment so far. At the moment the majority of traders are betting on the metal's rally (59%), while the bearish share is minor of just 41%.

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%.














Spreads (avg,pip) / Trading volume / Volatility


Average expectation among market participants for the end of March 2016 is 1,100

Meanwhile, traders, who were asked regarding their longer-term views on gold between Nov 17 and Dec 17 expect, on average, to see the metal around 1,100 by the end of next year's March. At the same time, 49% (+1%) of participants believe the price will be generally below this level in ninety days. Alongside, 33% (-3%) of those surveyed reckon the price will trade in the range between 1,100 and 1,250 throughout the next three months.

© Dukascopy Bank SA

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