Gold Price Fundamental Forecast: Neutral
- G20 Leaders’ Summit underwhelmed, US yield curve inversion sparked fears in markets
- Gold prices found strength amidst weakness in US Dollar and government bond yields
- Next week holds numerous uncertainties for gold: Brexit draft vote, US CPI and ECB
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Last week, gold prices had a chance to close at their highest since the middle of July. The fundamental backdrop was a combination of declines in the US Dollar and local front-end government bond yields. Since gold is priced in USD, a weaker greenback makes the precious metal relatively more expensive. As for the latter, when bond yields decline, the non-interest bearing asset looks comparatively more appealing.
This was largely thanks to two themes that emerged. The first was a G20 Leaders’ Summit that underwhelmed US China trade war relief bets. Then, markets started worrying about the economic implications of an inverted yield curve. Although fears about the latter may have been unfounded when looking at which maturity spreads saw inversion.
The week ahead offers a couple of notable event risks for gold starting with what could spark more market-wide pessimism. On Tuesday, the UK Parliament is readying up to vote on Prime Minister Theresa May’s Brexit deal. This past week saw Mrs. May lose a few votes that eroded confidence in getting her draft passed. Should the vote be lost, the threat of more uncertainty could continue fueling risk aversion in stocks and FX. If Fed rate hike bets fall further as a result, then gold could prevail in this scenario.
Speaking of, we then have US CPI data which is due on Wednesday. Lately, near-term Fed rate hike bets have been fading. While the December monetary policy announcement is still more than a week away, firming price pressures may revive the US Dollar which would bode ill for gold. Lately, domestic economic news flow has been tending to disappoint though which opens the door to more of the same. Next week may also bring with it greenback gains if markets take hawkish bets ahead of the December Fed rate decision.
Thursday contains the ECB policy announcement. Policymakers are anticipated to wind down the asset purchase programme and leave rates unchanged. Traders will be watching for what 2019 could entail and the threat of European political instability and Brexit could make for a cautious tone. Should bets of an ECB hike in 2019 get pushed back, gold prices may fall if the US Dollar rises as a result. But don’t count out the possibility of more market pessimism. The fundamental outlook for gold will have to be neutral.
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–— Written by Daniel Dubrovsky, Junior Currency Analyst for DailyFX.com
To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter