In contrast to the usually quiet pre-FOMC trading, markets were surprisingly volatile on Wednesday. US equity indices were tacking on around 0.5%-0.7%, the greenback fell and commodities rallied sharply. In addition to a big breakout in oil, gold turned sharply higher, providing some relief for beleaguered bulls.
In essence, the primary fundamental catalyst for Wednesday’s rally in the yellow metal was the US Consumer Price Index (CPI) report, which showed that price pressures in the world’s largest economy remain tame. On a headline basis, consumer prices fell -0.1% m/m against an expected 0.0% reading, though the more important (for policymakers at least) “core” reading, which excludes more volatile energy and food prices, came in at 0.1% m/m as expected. Coming on the eve of Thursday’s massive FOMC meeting, the report left a sour taste in the mouths of “Team September” (traders who expect the central bank to raise interest rates Thursday).
One of the obvious beneficiaries of the accompanying dollar weakness has been gold, which is both denominated in US dollar and seen as a store of value in competition with the greenback. Today’s big rally has created at least four significant bullish technical signals:
1) Gold is currently showing a Bullish Marubozu* candle on the daily chart, signaling strong buying pressure and hinting at a potential continuation higher this week.
2) The yellow metal has also broken above its 50-day MA, a widely-watched technical indicator near 1120.
3) The commodity has also surged through the top of its nearly 1-month descending wedge pattern. Though it’s created through a series of lower lows and lower highs, this pattern actually shows waning selling pressure and has bullish implications.
4) The Slow Stochastics indicator has turned sharply higher from oversold territory, signaling a big change in the character of the market.
Of course, gold’s future price action will depend on what the FOMC opts to do in its meeting, but as long as the Fed does not hike rates (likely, in our view), a short-term continuation higher is in play (see “FOMC Preview: Not two, but four potential outcomes for markets” for more on the possibilities). To the topside, bulls may look to target the early September high near 1145 next, potentially followed by the 2.5-month high around 1170 in time. Meanwhile, a reversal back below the 50-day MA at 1120 could turn the near-term outlook back in favor of the bears for a retest of the sub-1100 lows.
Source: FOREX.com