Gold Undecisive at the 50 Daily SMA, Depending on US Data
Gold was surging from November until the end of January, but made a quick reversal last Friday and now it remains uncertain right at the 50 SMA (yellow) in the daily chart, which is acting as support. We are seeing no bounce, as markets wait for more data from the US economy.
The FED went through the fastest tightening period last year, delivering several 75 basis points (bps) rate hikes, but they started to slow down in the last few months as economic data showed deterioration in the US economy, which pointed toward a possible recession.
But, it seems like we might avoid a recession and traders are rethinking the monetary path, following the strong non-farm jobs and ISM services data on Friday last week which showed a strong bounce in January, leaving behind any recession fears. At first glance, it means that the FOMC dot plot is correct and the terminal rate of 5-5.25% at the June meeting should be the top.
That’s something the market can handle, especially if it comes with a strong economy. But, what if the FED keeps tightening and rates go higher and for longer? So, although 5.25-5.50% would be bullish for the USD, it would not be too extravagant. The real trouble comes if the FED keeps pushing up to 6%. In that case, fixed income markets would need to reprice.
There are traders who are putting large positions in options worth hundreds of millions, betting on the FED to keep tightening further until September. The economic data will be the main factor though, and the next major release comes next week with the US January CPI (consumer price index) inflation report. If inflation doesn’t continue to fall, including core CPI, then traders could start to rethink the path of rates, which would be bullish for the USD.
Jerome Powell mentioned rate cuts as well in the last FOMC meeting, which was bearish for the USD initially, but it might turn into a bullish comment, since traders are expecting rate cuts toward the end of the year now. If the labour market remains strong and jobs keep increasing, then rate cuts will be pushed further down the line.
Gold XAU Live Chart
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