Gold reaches $1180 a few weeks early
The Eurodollar unexpectedly entered a correction period last week. Fears over the FOMC Minutes release being perceived as dovish encouraged USD weakness. The Federal Reserve continued to refuse to drop a hint regarding a potential timeframe to raise rates, while also changing its bias slightly by suggesting a higher valued USD would impact US inflation levels. As a result, the EURUSD appreciated.
The upcoming week might not be high in quantity with EU economic releases, however the spotlight will remain on Germany. On Tuesday the latest German ZEW Survey is released, with investors looking for further clues regarding whether Germany could be heading to a recession. On Wednesday, German inflation data for September is released. Data over the past month or so has alarmed economists. Disappointing economic releases have included an unexpected manufacturing contraction alongside a decline in factory orders, and import/export data. If this results in a slowdown in German CPI levels, investors might begin pricing in action from the ECB.
Looking at the technicals, the EURUSD has found itself back inside its bearish channel after a false breakout lower. A technical strategist could suggest that the correction period last week might be a preparation for the next Eurodollar leg lower. If EU economic data continues to inspire downside Eurodollar movement, the pair can now move lower without breaking out of its technical pattern.
Support levels can be found at 1.2576 and the current yearly low, 1.2499. If the EU economic sentiment unexpectedly improves and encourages Eurodollar purchasing, potential resistance can be found around 1.2742 and 1.2790.
The Cable struggled to find any direction last week, alternating between a bullish and bearish sentiment. USD weakness encouraged the pair to make it up to 1.62 but just as I thought the bulls might be taking control, an unexpected slowdown in UK Construction Output encouraged downside movement. The Bank of England (BoE) had previously warned the UK would enter slightly weaker economic growth in Q3, with the disappointing construction data providing some validity to those claims. Various comments from Chancellor George Osborne suggesting that the EU economic problems pose the largest threat to the UK economy may have also weakened GBP investor appetite.
This week, there are two pieces of high risk economic news – inflation data and an employment report. On inflation, Business Secretary Vince Cable attracted headlines recently for suggesting that the GBP was overvalued by 10% and this was having a detrimental impact on CPI levels. The BoE has a long standing threshold 2% inflation target to consider a rate rise and if UK inflation unexpectedly declines, bearish movement in the GBP is likely.
On Wednesday, the latest employment report is out. The UK employment sector has surpassed expectations for some time but within the past two weeks, both manufacturing and construction data have disappointed. If these emerging indications of a potential slowdown in fundamentals have a detrimental impact on UK business hiring, the GBP will be subject to volatility.
From a technical standpoint, this pair continues to find itself inside the same wedge pattern it has been following for the past few months. If the pair moves to the upside, we might actually breakout of this pattern. In which case, resistance can be found at 1.6180 and 1.6225. However, if the pair is going to continue following the direction of the wedge pattern, a move to the downside is required. If CPI disappoints, there is high potential for bearish movement in the Cable. GBPUSD support levels can be found at 1.6008 and the current yearly low, 1.5915. October’s US Non-Farm Payroll release, Gold declined and hit the $1180 target a few weeks earlier than previously forecast. Fears over a potentially dovish FOMC Minutes release on Wednesday evening encouraged a reversal though, with Gold appreciating by $40 within a few days. Impressive Initial Jobless Claims softened Gold’s progressive momentum.
Despite political unrest in Hong Kong and airstrikes in the Middle East, Gold continues to be trading in accordance with US economic news. Therefore, investors should keep an eye on US Small Business Confidence (Tuesday), Advance Retail Sales (Wednesday) and Initial Jobless Claims (Thursday).
As regards technical observations for Gold on the Daily timeframe, the blue support level highlighted on the chart above represents where the “triple bottom” was formed. Although a reversal might have commenced already, I still see the potential to re-test the low towards the end of October – around the same time the Federal Reserve officially conclude QE.
Support can be found at $1214, $1207 and $1200. If the recent appreciation is to continue, resistance is located at $1234 and $1242.