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According to some analysts, next week will be an important test for the gold market as a hawkish Fed could put downward pressure on a market that is already sensitive following Monday's blow-off top.
After hitting a record high around $2,150 an ounce at the start of the week, gold prices are heading into the weekend down more than 3%, testing critical support just above $2,010 an ounce. With a $141 swing this week, the gold market saw the most volatility since mid-August 2020, just after gold established its previous record high.
Ole Hansen, head of commodity strategy at Saxo Bank, said that Monday's rally and subsequent selloff was not helpful for gold's long-term price action.
"Technically, gold has a lot of work to do to make up for the damage that was done," he said
Along with overbought momentum, Hansen said the gold market has run too far ahead regarding potential rate cuts in 2024, which could keep prices below $2,050 an ounce in the near term.
Some cold water was poured on a potential rate cut in March after employment data on Friday showed that the U.S. economy created 199,000 jobs last month, beating expectations. At the same time, the unemployment rate dropped to 3.7%, down from 3.9% in October.
"At the very least, we are going to see volatile markets and the room for a positive surprise for gold will be limited," Hansen said.
Craig Erlam, senior market analyst at OANDA, said he is also expecting to see elevated volatility in gold in the near term.
"It really has been quite the week for the yellow metal and with US inflation and the Fed interest rate decision to come next week, the volatility may not be going anywhere," he said.
Phillip Streible, chief market strategist at Blue Line Futures, said that he is expecting to see some downward pressure on gold. He added that after Friday's employment report, it is unlikely Federal Reserve Chair Jerome Powell will shift his hawkish stance, even as the central bank is expected to leave interest rates unchanged.
Gold could be sensitive to updated dot plots
It's not just a hawkish Powell that threatens the gold market. Along with its monetary policy decision, the Federal Reserve will release its updated economic projections, including its interest rate forecast, also known as the dot plot.
In the last update in September, the central bank signaled that it sees only two potential rate cuts in 2024. However, markets are pricing in more than 100 basis points of easing next year. According to the CME FedWatch Tool, markets see a nearly 60% chance that the first cut comes in March.
"There is going to be a clash between the Fed and market expectations unless we see a major adjustment in the dot plots," said Hansen.
Along with the Fed meeting, analysts have said that November's Consumer Price Index data could also add to the market volatility. Some analysts have said that if core inflation remains above 3%, it will force the Federal Reserve to maintain its tightening bias.
Keep an eye on BOE and ECB
While the Federal Reserve is in the spotlight next week, the Bank of England and the European Central Bank will be releasing their monetary policy decisions, with markets expecting rates to remain unchanged. However, investors are still anxious to see if there is a shift in their tightening biases.
Although gold prices could struggle next week, some analysts note that the market is still in good shape.
In a recent interview with Kitco News, Joseph Cavatoni, North American market strategist at the World Gold Council, said that he doesn't see Monday's failed rally as very harmful. He said that the rally shows how much potential the precious metal has when it sees the right market conditions.
Streible said that although prices may go lower, he thinks the current price is an attractive entry point.
"Here is where you start to dip your toe in the market," he said. "The downside is limited in gold. Although Powell won't be ready to cut rates in March, a slowing economy means that interest rates are ultimately going lower and that is what will propel gold higher."
Hansen said he is watching to see if gold prices will hold support at $2,010, adding that a break of that level could trigger some essential stops in the marketplace and create new selling momentum. He said that if 2,010 breaks, investors should keep an eye on the 200-day moving average of $1,959 an ounce.
Streible said that he is looking for support to be tested around $1,980 an ounce.
Economic data to watch next week:
Tuesday: U.S. CPI
Wednesday: U.S. PPI, FOMC monetary policy decision
Thursday: Bank of England monetary policy decision, European Central Bank monetary policy decision
Friday: Empire State manufacturing survey, Flash PMI
By
Neils Christensen
For Kitco News
