Investors received an unexpected gift during trading on Tuesday when gold surprising dropped below its psychological support level at $1300, which allowed an opportunity for traders to quickly drag the metal to levels not seen since the EU referendum below $1270. Gold has since fallen to a three-month low at $1266 and the unexpected decline through psychological support at $1300 basically means sellers have regained control of the metal. The USD is on the whole strengthening across the currency markets with this not being good news for gold, but there is the possibility that the yellow metal can continue its unexpected slip as we head further into October.
The reasoning for the possibility of further declines in gold basically rests on US interest rate expectations. The US Federal Reserve are clearly committed towards raising US interest rates before the end of the year if you take into account their public comments on the matter. However investors have still not priced this into the financial markets and this means traders would find the opportunity to price in further declines into the value of gold. Investors are likely to keep a close eye on the US employment report scheduled for release this coming Friday because the NFP will play a critical role at providing confirmation that the Federal Reserve can indeed raise US interest rate before the end of 2016. Confirmation would support dollar demand, but naturally present further risks to the value of gold.
Elsewhere the British Pound has continued to crumble in the early hours of trading on Wednesday with the GBP/USD finding another 30 years plus low below 1.27 at 1.2684. Confirmation over the weekend from UK Prime Minister Theresa May that Article 50 will be invoked by March 2017 heavily encouraged investors to price in further risk into the British pound, while the comments from Chancellor Phillip Hammond that austerity is not over has also weighed heavily on investor sentiment.
The buying sentiment towards the British pound is at such weak levels that the currency has failed to regain any of its losses despite economic data once again this week pointing out that the EU referendum outcome has not yet had a detrimental impact on the UK economy. The Manufacturing PMI for September has helped boost optimism that the depression in the pound is benefiting exporters, while the Services PMI released a few hours ago has failed to show that the EU referendum outcome has led to an immediate downturn for the UK economy. Services represents such a critical component of the UK economy that the reading meeting expectations today will eventually lead to GDP remaining supported for the coming quarter.
How low can the British Pound go? I maintain my own view that the GBP/USD can conclude the year between 1.20 and 1.25. Investors are only just beginning to price in the added risk of Article 50 being invoked, meanwhile the overwhelming majority of the losses seen in the Pound over the past couple of months was just led to be the unexpected EU referendum outcome. Investors now need to begin readjusting their mindset towards the fact that the United Kingdom will soon begin the process of actually leaving the EU, and this is going to be an anxious road for the UK government and should ensure the Pound remains depressed for a prolonged period.
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