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Gold prices pressured on Fed’s rate hike speculation

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The precious metal closed 1.49% lower last week following Friday’s speech by Fed Chair Janet Yellen at the Jackson Hole symposium. Joining the chorus of other FOMC members, the markets are currently re-pricing the expectations of a rate hike from the Federal Reserve, as early as September. This week, gold fell to an 8-week low at $1309.07 an ounce as the bullish momentum in the US dollar continued into the first half of the week. On a monthly basis, gold is currently down 2.65% after the strong bullish rally over the previous two consecutive months sent gold prices to a 27-month high of $1375 an ounce.

There have been no new economic releases that could impact the Fed’s decision so far this week, but this could change come Thursday as a new trading month see’s important data including the ISM manufacturing, and this Friday’s payrolls report that could shift sentiment in either direction. While Monday’s core PCE data showed a 1.60% increase, investors are more likely to focus on the upcoming unemployment report, which gains attention after quite a few Fed members, including the Fed Chair Janet Yellen saying that the Fed was close to fulfilling its mandate of full employment and price stability. Tuesday’s consumer confidence report from the Conference board jumped unexpectedly in August to 101.1, beating expectations of 97.0, keeping the bullish momentum going in the US dollar.

While uncertainty has cleared a bit in terms of central bank policies, it is likely to take a lot more of hard evidence to convince the gold bulls of a Fed rate hike in September. As of 30 August, the CME futures Fed funds watch tool has seen the implied probability of a 25bps rate hike increase to 24%. It was at 21% previously.

CME Futures, Fed Funds Watch, implied probability 24%, 30/08/2016 (Prev. 21%)
CME Futures, Fed Funds Watch, implied probability 24%, 30/08/2016 (Prev. 21%)

Over the last week, Fed’s vice-president Stanley Fischer said in an interview with Bloomberg that the Fed’s decision to raise interest rates would not be a ‘one-and-done’ affair. He said that the US economy managed to overcome the stronger US dollar. “The bottom line on this is we have seen an appreciation of the dollar and the American economy continues at full employment – or its move towards full employment,” Fischer said.

Still, not many are convinced that the Fed would be able to hike rates as early as September. Strategies from Morgan Stanley, Matthew Hornbach and Guneet Dhingra, say “While August payrolls present an obvious risk, we continue to believe market implied probabilities for a September rate increase will end at zero, not 100.”

$1300 psychological support in sight

Following up from last week’s technical outlook, gold prices could most likely drop to the $1300 in the near term, although the short term fundamentals could be seen clouding the outlook. With the resistance zone established near $1350 – $1365 and the break of the minor rising trend line, we currently notice a potential hidden bullish divergence that is forming. Although gold prices are seen posting a modest recovery at the time of writing, it is unlikely to expect this short-term pullback as a full recovery in price. Therefore, despite any short-term bounces, gold prices are more likely to fall to the $1300 psychological support level which also shows confluence with the longer term rising trend line, from where we could expect a near-term bounce back to the upside.

XAUUSD (1315.81): Support seen at 1300 (horizontal/trend line)
XAUUSD (1315.81): Support seen at 1300 (horizontal/trend line)
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