Gold, testing 1350 resistance zone, awaiting NFP and BoE events

The price of spot gold rallied strongly in the first two days of this week riding on a weaker US dollar and the monetary policy actions from the Bank of Japan last week and yesterday’s fiscal stimulus announcement. Spot gold closed at $1363.62 an ounce, trading near July 11 highs. The gains came following last week’s rally which saw gold prices rise by over 2.0% on the week.

Unconvincing FOMC tone and weak GDP

Weak economic data from the US, which was onset by the release of the second quarter’s preliminary GDP estimates that came after last week’s FOMC meeting saw a weaker dollar which also added to the upside in gold. The Federal Reserve’s FOMC statement did not offer much in terms of September rate hike with markets continuing to https://www.orbex.com/admin/dashboardshow that the Fed is likely to hike rates only once in the remainder of the year. This market conviction grew stronger after last Friday’s Q2 GDP release which showed that the US economy grew only 1.20% in the three months to June. The weaker than expected GDP pushed out rate hike expectations which saw gold prices jump while the safe haven bond yields plummeted.

David Govett, head of precious metals at Marex Spectron said, “The Fed seemingly is in hold mode, which is positive for gold, but every once in a while they let slip that September is still a possibility for a rate rise.” Robin Bhar, head of metals research at Societe Generale, however, said that the bullish news, in reference to this Friday’s NFP report was already priced in. “I think [gold is] really going to struggle, and we’re going to tread water until the Friday jobs period,” Bhar said.

Japan stimulus reaching its limits

The past couple of days saw a lot of monetary policy action from Japan. Still, it was not quite convincing for the markets. Last Friday, the Bank of Japan announced modest stimulus measures, ramping up ETF purchases. The yen rallied as the markets were expecting the BoJ to do more. The central bank left the interest rate unchanged at -0.10% and left the QQE unchanged at 80 trillion yen. While the yen had weakened previously on rumors of Abe’s fiscal stimulus plans, the yen strengthened after it was known that only a quarter of the 28 trillion yen would amount to direct spending. When Abe announced the fiscal stimulus plans yesterday, then yen resumed a new round of selling.

Qian Wang, a senior economist for Asia at Vanguard said, “It is not a game changer nor can it lift up economic growth in the long run.”

Against the major backdrop, gold prices managed to rally strongly as a result. In the near term, the US jobs report on Friday will be key to determining further direction in gold. Also, watch for the Bank of England’s meeting this Thursday where an interest rate cut is fully priced in. The announcement of expanding the BoE’s asset purchases could most likely keep gold prices well supported to the upside.

Gold – Technical Outlook

The daily chart for gold shows the turnaround in prices after falling to the support zone of 1300 – 1315.71. The rally from here sent prices back to trading near the early July levels of 1360 – 1350. On the daily chart, we also see the potential for a bearish divergence that could see gold prices likely to correct lower if 1350 – 1360 turns out to be resistance. To the downside, 1300 – 1315 remains the initial support to watch for.

In favor of the bearish view is the fact that gold prices are currently trading near the early July highs of 1375. Posting a lower high at the current level could confirm the near-term correction to 1300 – 1315.