Gold Rebound Stalls Ahead of Resistance- Forecast Hinges on FOMC, NFP

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Gold Rebound Stalls Ahead of Resistance- Forecast Hinges on FOMC, NFP

Fundamental Forecast for Gold: Bearish

Gold prices are markedly higher at the close of trade this week with the precious metal rallying 2.87% to trade at $1332 at the close of trade in New York on Friday. The advance comes on the back of persistent weakness in the U.S. Dollar which was battered on growing speculation for a more dovish FOMC next week. However with a plethora of key event risk next week, we will maintain a neutral stance as we head into the close of the month with price action late next weekly likely to offer further clarity on a near-term directional bias. That said, the broader outlook remains weighted to the downside below key technical resistance at $1397.

Looking ahead to next week, gold traders will be closely eying the slew of central bank rate decisions along with the highly anticipated non-farm payrolls report on Friday. Although the Fed, ECB and BoE are widely anticipated to maintain their current policies, the fresh batch of central bank rhetoric may heavily impact the gold trade as market participants weigh the outlook for monetary policy. With the growing discussion at the Federal Reserve to taper the asset purchase program, further details surrounding the exit strategy may dampen the appeal of bullion as Fed Chairman Ben Bernanke has already outlined a tentative timeline for its easing cycle. However according to Jon Hilsenrath- the unofficial mouthpiece for the Fed – the central bank may adopt a more dovish tone for policy and further emphasize its pledge to keep interest rate exceptionally low for an extended period of time, with the statement spurring speculation that the FOMC will ultimately implement more stringent forward-guidance for monetary policy.

The July non-farm payroll report will take center stage on Friday with consensus estimates calling for a print of 185K jobs with the headline unemployment rate widely expected to fall to 7.5% from 7.6%. With talks of taper dominating the headlines, a stronger read could offer some support to the battered U.S. Dollar as it becomes increasingly difficult for the central bank to justify further asset purchases amid the accelerated recovery in the labor markets. As such, the rally in gold remains at risk ahead of the print with the technicals suggesting that topside advances past $1350 may be limited.

From a technical standpoint, gold has continued to trade within the confines of a well-defined ascending channel formation dating back to the June lows with this week’s rally topping out just ahead of key resistance at the 1.618% Fibonacci extension off the June lows at $1349. A breach above this level risks a run on the 61.8% retracement of the decline off the May highs at $1370 and the $1393/97 pivot range. Only a break above this level invalidates the broader downtrend. Interim support rests at the 23.6% retracement off the June lows and is backed closely by $1295/97. A move below this threshold invalidates the ascending channel formation and puts subsequent support targets in view at $1262/68, $1243 and $1215. Bottom line: topside in the near-term remains a risk with rallies into our key thresholds offering favorable short entries. -MB

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