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Gold ranges as traders wait for the FOMC

Gold chart 09 21

Gold traded lower and didn’t really react to the rising triangle low yesterday. As a result, we have a sideways range between 1659 and 1680. The market remains in a downtrend as long as it trades below 1680. My breakout targets from the range are almost the same as for the triangle. Above 1680 my targets are 1687 (T1) and 1730 (T2). The new downside targets are 1648 and T2 at 1638. Fed Funds futures traders have an 82% probability for a rate hike today and a 60.7% probability for another 75bp in November. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.

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Clearly, the markets expect the Fed to stay aggressive and thus the downside risk for gold still remains. What could change the direction of this market is a sudden change in the FOMC statement or press conference that’d lower the probabilities for aggressive future rate hikes. As I said yesterday let’s focus on a) what the Fed does and signals today and b) the market reaction to it.

DAX chart 09 21

DAX gave it all back and provided no opportunities on the long side. Only after the market moved to new lows for the week there has been some consolidation. The market is once again trading above the September 5th low (12591) which suggests that value investors are interested in Dax around this level. However, again (as so often on days like these) taking technical views on the market is pretty impossible as we don’t know what the Fed will say, and how Dax will react to it.

Perhaps the recent weakness in Dax means today’s rate hike is already discounted and we get a technical counter move (a move higher). Another possible scenario is that the Fed will signal that they will remain hawkish and will keep on lifting the rates aggressively in the future too. This would send a message to value investors that they’d need to wait for lower prices to get the value they are after (Dax would decline).

NAS chart 09 21

NAS – Nasdaq was relatively much stronger than DAX or DJ yesterday. The index created a higher swing low at 11760. This is a bullish indication but the market needs to rally decisively beyond the resistance at 12000 and preferably above the 12186 resistance level too. Otherwise, the downside risk remains considerable. And, again we need to see what the Fed says and how the markets react to it.

DJ chart 09 21

DJ found support once again around the 30486 and is effectively ranging between this low and a resistance level at 31270. A decisive break above the level would be bullish but before I see how the markets react to Fed today I don’t see a point in predicting whether the market would be likely to do that. As always, it’s better to just trade what you see the price doing and not what you are anticipating. However, should there be some dovish signs in the Fedtalk today and the market rallied strongly above the 31270 level then I expect DJ could move to 31700 or so. Alternatively, if we only get a small peak above the resistance level (say to 31350) and then a move back inside the range then the likelihood that the market will either test or even break the 30486 level is quite high.

EURUSD chart 09 21

EURUSD trends lower in the daily timeframe. The market has created yet another lower high at 1.0050 and below this level is likely to move to 0.9864 and probably also below it if the Fed remains aggressively hawkish. In order for us to see a trend reversal in EURUSD, there’d need to be a decisive rally above 1.0197.

Macro Drivers for the USD 

As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.

The Federal ReserveFed hiked the target range again by 75bps (to 2.25%-2.5%). This was the fourth consecutive rate hike. The rate hike was in line with analyst forecasts. The Fed noted that ongoing increases in the target range will be appropriate but the next decisions will be data-dependent.
YieldsThe 10-week range in the US 10-year treasury yield has been from 2.516% to 3.498%. 
EmploymentThe US economy added 258 thousand new jobs. June number was revised from 390K to +384K and the average hourly earnings increased 0.5% (month over month) vs 0.3% predicted by the analysts. Such strong growth in employment and earnings reminds us how strong the US economy still is. 
InflationThe US inflation rate dropped more than expected. The July reading (YoY) came in at 8.5% after a 40-year high of 9.1% prior. Analyst forecasts had put the number at 8.7%. The cost of energy rose 32.9% (vs. 41.6% in June). Lower cost of petrol (44% vs 59.9%), fuel oil (75.6% vs 98.5%) and natural gas (30.5% vs 38.4%) contributed to the decline. The cost of electricity however increased by 15.2%. Food inflation however increased by 10.9% vs 10.4% prior. 

 The Next Main Risk Events

  • USD Existing Home Sales
  • USD FOMC Economic Projections
  • USD FOMC Statement
  • USD Federal Funds Rate
  • USD FOMC Press Conference
  • JPY Monetary Policy Statement
  • JPY BOJ Press Conference
  • CHF SNB Monetary Policy Assessment
  • CHF SNB Policy Rate
  • CHF SNB Press Conference
  • GBP MPC Official Bank Rate Votes
  • GBP Monetary Policy Summary
  • GBP Official Bank Rate
  • USD Unemployment Claims

For more information and details see the TIOmarkets economic calendar here

Trade Safe!

Janne Muta
Chief Market Analyst

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