There is a very high degree of uncertainty over market developments in the week ahead, but a fresh surge in volatility is guaranteed.
The Federal Reserve will announce its latest policy decision on Wednesday a few hours after the latest Bank of Japan announcement. Their decisions are likely to have a big short-term impact and an important influence on market direction for the remainder of 2016.
Even though there are expectations that the Fed will leave interest rates on hold, the FOMC is likely to be much more divided than in recent meetings with the more hawkish members, concentrated mainly among the regional Fed banks, clashing with more dovish voices on the committee.
This clash increases the risk of a surprise announcement and dissent within the committee, especially with Chair Yellen making only very limited policy comments.
At this stage, there is no consensus on what the Bank of Japan is likely to announce, increasing the chances of a very erratic market reaction.
The uncertainty has been compounded by the fact that the bank will announce the outcome of its policy review. There has been conflicting advice from government advisors and a lack of consistency by Governor Kuroda. There are clear differences of opinion within the Board itself, although there has been a commitment not to tighten policy.
There is also uncertainty surrounding moves to steepen the yield curve and there will be an important impact on global bond markets.
There was a mini tantrum in bond markets earlier this week as long-term rates surged and the Bank of Japan announcement is likely to trigger another sharp reaction in global bonds.
Actions of the Bank of Japan and Federal Reserve will also have important impacts on China and the Euro-zone, with the risk of a fresh flare-up in volatility in both as structural fears persist.
Globally, central banks appear increasingly uneasy over the impact of ultra-low interest rates, and pressure for a rebalancing towards more aggressive fiscal policies will continue. The policy announcements this week will be an important piece of the global jigsaw and help to galvanise opinion on whether a sustained policy shift is likely.
Bond and equity market correlations have been increasing and there will also be big moves in equities following the central bank announcements. Volatility in commodity markets has also increased and there is scope for big moves in precious metals.
Dollar Libor rates remain at elevated levels, close to seven-year highs, which will tend to put upward pressure on the dollar and is liable to undermine carry trades funded through the US currency. There is, therefore, the risk of aggressive position closure.
Commodity currencies have been under pressure while crude prices have fallen this week despite better than expected inventories data.
September is always a dangerous month, with investment strategies having to be re-examined after the summer period, with big swings in institutional holdings and re-allocation of funds. Changes in real-money flows can have a big knock-on effect as speculative funds are forced to close positions.
Historically, September is also the worst month for US equity-market returns and very choppy trading is guaranteed over the next week at least.
Fundamental Forecast for Gold Prices: Neutral
Gold prices are lower this week with the precious metal off 1.46% to trade at 1308 ahead of the New York close on Friday. The losses come as amid a volatile week in US markets with major equity indices whipsawing to close the week slightly higher ahead of next week’s highly anticipated FOMC policy meeting.
U.S. economic data was mixed this week with a miss in retail sales followed by a stronger-than-expected print across the board on Friday’s CPI release. Despite the beat on CPI, the core Personal Consumption Expenditure (PCE), the Fed’s preferred inflationary gauge, remains stubbornly low at just 1.6% and continues to be a concern for central bank officials. The jury is out on whether or not the FOMC will have enough evidence to warrant raising interest rates this year and if inflation & employment continuing to approach the Fed’s respective targets, the case for policy tightening becomes harder to refute.
Looking ahead to next week, all eyes will be fixated on the FOMC interest rate decision on Wednesday. As it stands, markets are expecting the central bank to remain pat on interest rates with Fed Fund Futures pricing in the odds of a rate hike at just 20%. That said, the focus will be on the updated quarterly projections as they pertain to growth, inflation & unemployment. Recent rhetoric from the committee suggests that there is a growing willingness to begin policy tightening and if the vote count shows more dissenters join Kansas City Fed President Esther George in supporting a move to raise rates, look for the greenback to remain supported at the expense of gold.
A summary of the DailyFX Speculative Sentiment Index (SSI) shows traders are net long Gold- the ratio stands at 2.29 (75% of traders are long)- bearish reading. Note that long positions are 32.9% above levels seen last week while short positions fell 41.0% over the same period. The increase in long positioning on building open interest keeps the downside bias in focus heading into next week but it’s important to keep in mind that SSI is coming off extremes not seen since January, just before prices bottomed.
Gold is eyeing a key near-term support confluence into the close of the week at 1302/04 where the 100% extension of the decline off the early high converges on the 100-day moving average, the monthly low & the May high. The immediate downside bias is at risk while above this level near-term with initial resistance eyed at the monthly low-day close at 1323 backed by 1330.
A break below this level risks a drop into a confluence support zone at 1287– an area of interest for exhaustion / long-entries. We’ll reserve this level as our broader bullish invalidation zone heading into next week’s FOMC rate decision. From a trading standpoint, I would be looking to fade gold weakness lower down into structural support with a breach above the upper median-line parallel needed to put the broader topside bias back in play targeting 1355 & 1366.
Gold’s premium over silver weakened this week, as the yellow metal fell to its lowest level since before the Brexit crisis.
The gold to silver ratio that is used to gauge the relative value of precious metals closed at 69.28 on Friday. This essentially states that one ounce of gold is equivalent in value to 69.28 ounces of silver. The gold to silver ratio was closer to 70 at the start of the week.
December gold futures settled at $1,310.20 a troy ounce Friday, their lowest since the day of the Brexit vote on June 23. Following Britain’s decision to leave the European Union, gold prices spiked to 27-month highs, as demand for riskier assets faded.
For the week, gold prices fell 1.8%.
Silver prices settled down 2.7% for the week to close at $18.84 a troy ounce. That was the lowest level since August 31.
Dollar-denominated commodities fell after a report on inflation lifted the US currency to its highest level in nearly six weeks. The dollar index, which tracks the value of the greenback against a basket of currencies, rose 0.9% to 96.11 on Friday. The dollar strengthened 0.8% during the week.
The Federal Open Market Committee (FOMC) and Bank of Japan (BOJ) are scheduled to begin their policy meetings on Tuesday. Although the Federal Reserve is not expected to raise rates, the outlook on the BOJ is less certain.
The Reserve Bank of New Zealand (RBNZ) will also issue a rate decision on Thursday.
Last week the Bank of England (BOE) voted to leave policy unchanged, but signaled that another rate cut was on the horizon.
Central banks will be in the limelight all week long, and could trigger volatility across all asset classes. A signal by the Fed that rates will resume rising sooner rather than later will likely trigger fresh selling pressure in precious metals.
Silver prices continued lower in the past week, after a failed recovery attempt near the upper bound of a declining channel triggered a turn lower on September 7. XAG/USD has shown some resiliency as the momentum has slowed in the decline ahead of significant support, showing underlying strength when compared to Gold prices. The technical outlook for silver prices shows a potential of a bullish flag pattern developing from the early July spike high, while the Fed meeting in the upcoming week stands to trigger a sharp turn lower.
Expectations for a near-term rate hike in the United States remain firm with the futures markets showing probabilities hovering near highs seen since the EU referendum. Chances of a rate increase by December stand at 55% ahead of this week’s Federal Reserve meeting, while a hawkish statement or press conference shows room for further movement.
Following hawkish comments from several Fed members and the Fed chair in August, rhetoric from the meeting in the upcoming week will be closely watched to gauge the central bank’s level of commitment to raising interest rates this year. Silver prices remain at risk in the event optimism for a near-term rate hike increase following the meeting.
Significant support is seen in silver prices at $18.19, referencing the highest close in January 2015 as seen on a weekly chart. A decline in late August was seen turning ahead of the level, while the current declining has slowed ahead of the lows. Several downside technical levels indicate strong support in the event of a further decline in Silver prices. The declining channel from early July highs offers support at the lower channel line, while horizontal support remains at $18.19. Critical support for silver prices is seen near the $17.50 level as a rising trendline from January lows comes into play. The first level of resistance is seen at $19.20, the level has been respected as of late, holding prices higher in July. Further resistance comes from the upper line of the declining channel from early July highs.
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