Gold forecast: XAU/USD breakout needs confirmation

Gold prices rallied sharply today, reversing yesterday’s losses and some. It is quite common for markets to reverse the FOMC-related moves within 24 hours and yet again this has proven to be the case. Now that we are back to pre-FOMC levels, the key question is where do we go from here? While gold may have formed a technical bullish signal today, the fundamental backdrop remains tied pretty much to the same factors that have been weighing on prices lately: oil prices and bond yields. Both eased today, but with the Middle East situation far from resolved, oil could easily come back. That makes it difficult to change our cautious gold forecast to outright bullish just yet, despite the bullish post-FOMC price action.

 

Hawkish Fed didn’t matter in the end

...But will it, eventually?

 

The Fed was quite hawkish on Wednesday, and initially, markets reacted accordingly: Stock markets, foreign currencies and gold all fell, as the dollar strengthened with concerns about higher interest rates coming back into focus.

 

But interestingly, the sell-off in equities and gold reversed completely. At the time of writing, US indices and precious metals were back above their pre-FOMC levels.

 

So, why are the markets proving so resilient despite what was clearly a hawkish Fed? Well, the message from the Federal Reserve was difficult to interpret as dovish, suggesting markets were potentially already discounting a hawkish Fed.

 

Indeed, the dot plot showed that most policymakers still expect at least one more hike this year. Twelve of the 18 officials see another increase, while four expect two more. The Fed also raised its growth and inflation forecasts and lowered its unemployment projection.

 

Will gold be able to resume higher from here?

 

From a macro point of view, the slightly lower yields and weaker US dollar today are positives. But if oil prices remain elevated, or move even higher, inflation concerns could return very quickly, and markets may start betting on two rate increases for the remainder of the year.  That would be a much more difficult environment for gold to thrive in.

 

From a technical perspective, you might have noticed the breakout from the falling wedge pattern, which looks similar to price action preceding the breakout in early August. While this looks technically bullish, let’s not forget the higher time frame analysis.

 

 

Gold has been effectively in consolidation mode since peaking back in January. The series of lower highs and lower lows have not yet been violated to suggest the trend has turned bullish on XAUUSD again. Thus, the bigger risk is if this bullish-looking price action turns out to be another false signal – similar to the price action in the first couple of days of September. IF that turns out to be the case, then we could see a much bigger long side liquidation than we so far have.

 

Key resistance is now seen around $4,400. As a minimum, I’d like to see gold break above that level on a closing basis before I am convinced. Further resistance is seen around $4,500 and then $4,565.

 

Conversely, if gold turns lower from current levels, and goes on to eventually break below support at $4235, then that could pave the way for a continuation towards $4,100 initially, ahead of $4,000 next.

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R