Gold futures closes marginally higher last week, but remained inside the previous week’s range. This technical chart pattern tends to indicate investor indecision and impending volatility. Creating the indecision is uncertainty over the U.S. Dollar’s expected response to the escalating trade dispute between the United States and China. The only certainty at this time is next week’s widely expected Fed interest rate hike.
Last week, December Comex Gold futures settled at $1201.30, up $0.20 or +0.02%.
Driving the price action in gold last week was the U.S. Dollar. For most of the week, gold was underpinned by a weaker U.S. Dollar. On Friday, however, gold managed to give back all of its weekly gains when the dollar rebounded to the upside. Driving the U.S. Dollar’s price action was the investor response to fresh tariffs by the U.S. and China.
To recap last week’s key events, the Trump administration announced it would impose a 10 percent tariff on $200 billion worth of Chinese imports. This was actually bearish news for the dollar because the market had priced in a 25 percent tariff. However, the full amount will be applied on January 1 if a new trade deal isn’t made.
China retaliated by announcing levies targeting over 5,000 American products worth $60 billion. The new tariffs are scheduled to go into effect next week. Investors sold the dollar on this news because some thought that China would target the supply chain by preventing the export of strategic minerals and key components for U.S. electronic products.
Essentially, it was the unwinding of long U.S. Dollar hedges that drove gold prices higher. The easing of tensions over the U.S.-China trade dispute encouraged investors to sell the dollar and buy gold.
The trade dispute and the dollar will continue to drive the price action in gold this week. However, this week, the dollar could strengthen and gold could weaken. This is because China called off the trade talks with the United States and said it wouldn’t meet with high level negotiators until after the November mid-term elections.
Also contributing to the movement in gold will be the outcome of this week’s two-day Federal Open Market Committee meeting which culminates with the Fed’s interest rate and monetary policy decision on Wednesday, September 26.
Although the Fed is widely expected to raise its benchmark interest rate during the meeting, gold traders will be primarily focused on the direction the Fed will chart ahead. Traders essentially want to know how aggressive the Fed will be in increasing rates in the future.
The 25-basis point increase to the federal funds rate is already priced into the market. The hike will push the funds target to 2 percent to 2.25 percent, where it last was more than 10 years ago.
Since the rate hike has already been factored into the dollar and gold prices, traders will be paying more attention to any information that shows how much more monetary tightening will be necessary to keep the economy (and inflation) healthy.
Gold could be supported if the Fed appears to be too “dovish” in its assessment of the need for additional rate hikes. In other words if it drops the word “accommodative” from its monetary policy statement.
This article was originally posted on FX Empire