Gold Sell-off Intensifies as USD Firms- GDP, NFPs, in Focus

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Gold Sell-off Intensifies as USD Firms- GDP, NFPs, in Focus

Fundamental Forecast for Gold:Bearish

Gold prices plummeted more than 2.6% this week with the precious metal trading at $1313 ahead of the New York close on Friday. The losses charged by a massive rally in the greenback after the central bank left policy unchanged, but left tapering on the table at the FOMC policy meeting on Wednesday. When all was said done bullion was off by just 0.3% in October, a month that saw a range of more than $110 or 8%.

With tapering expectations largely pushed out until March, why is gold trading so heavy? Two answers arise, A- with inflation expectations well anchored in the medium-term (latest CPI data print 1.2% y/y & 0.2% m/m), the appeal of gold as an inflationary hedge remains subdued. B- As the economic recovery continues to gather pace, tapering will become more pressing on the Fed, which should in turn offer further support for the US Dollar. There does exist one scenario where the luster of gold would once again come into focus and that is a collapse in broader market sentiment- or in another words, equities. Should the recent 3-day pullback in risk assets develop into a larger trend, look for the risk-off trade to begin to resurface, with such a scenario likely to be supportive of the yellow metal.

Looking ahead to next week all eyes will be on the US economic docket with GDP, NFPs and the University of Michigan confidence survey on tap. Advanced 3Q GDP hits the wires on Thursday with consensus estimates calling for an annualized print of 1.9% q/q, down from 2.5% the previous quarter. October Non-farm payrolls represent the most significant event risk next week as expectations remain tempered on account of the Government shut-down and its possible impact on near-term job growth. Estimates are calling for a print of just 125K, down from 148K in September, with the unemployment rate widely expected to uptick to 7.3% from 7.2%. Again it will be important to note changes in the size of the labor force as we have seen that recent contractions in the labor pool have continued to put artificial downside pressure on the headline unemployment rate. A weak-than-expected read could limit the downside on gold prices in the near-term as investors begin to discount a delay in fed tapering.

From a technical standpoint, gold prices have now retraced 50% of the rally off the October lows after nearly tagging the 61.8% retracement of the broader decline off the August highs. A turnover in daily RSI just ahead of the 60-threhsold and a subsequent 50-break suggests that the larger momentum breakdown off the August highs remains in focus. With the November opening range now be putting in, we will remain prudent noting key support objectives at $1268 and $1233. Note that near-term price action may be stretched here with near-term rallies to be sold. Interim resistance stands at $1330 with only a breach above $1364 invalidating our bearish outlook.

---Written by Michael Boutros, Currency Strategist with DailyFX

To contact Michael email mboutros@dailyfx.com or follow him on Twitter @MBForex

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