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Gold to keep bullish trend next week: ECB, U.S. data in focus

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Gold to keep bullish trend next week: ECB, U.S. data in focus

(Kitco News) - After a very volatile session, gold is closing the day with a second straight week of losses while analysts remain bullish but slightly more cautious for next week.

Seeing gold hit new fresh six-year highs, then drop more than $50 on a weekly basis has been unnerving for traders. Yet, analysts are saying that both upside and downside potential is capped for gold until the next big market mover.

Weaker-than-expected employment numbers out of the U.S. have helped gold recover some of the losses from earlier this week, but the move was temporary. U.S. non-farm payrolls came in at 130,000 versus the expected 160,000; the unemployment rate remained at 3.7%.

“Gold should see some upside after the report. But, not a huge amount,” TD Securities head of global strategy Bart Melek told Kitco News on Friday. “Employment showed a little bit of weakness, but nothing the Fed is likely going to worry about.”

Federal Reserve Chair Jerome Powell added to gold’s volatility on Friday as his comments from Zurich, Switzerland talked down gold prices during the afternoon.

Powell highlighted significant risks, such as slowing global growth, uncertainty around trade policy, and persistently low inflation. At the same time, he said that recession is not expected in the U.S. He reiterated his call that “the most likely case for the U.S. is continued moderate growth.”

If gold ends the week in the green, the positive momentum could carry into next week, said RJO Futures senior market strategist Phillip Streible.

“I’m optimistic on gold next week … lightly bullish. If we end today in the green, it will be a good sign that yesterday was an anomaly and we should snap back. The $1,560-65 high is definitely a pretty solid resistance point. I’ll be light on positioning in the gold market until it breaks through there,” Streible pointed out.

Fed watching CPI, retail data, and the ECB

The focus next week will be on the U.S. data and its impact on the Federal Reserve decision, which is just under two weeks away.

The next Federal Reserve rate announcement is scheduled for Sept. 18 with the majority of the U.S. data so far not giving the Fed a reason to worry too much, Melek noted.

“The implication here is that the Fed is going to be in no hurry to add more accommodation than it has already been talking about. But, at the same time, it probably isn’t going to tighten ether,” he said.

The retail sales report is the most critical data set to keep an eye on next Friday, with markets expecting the August figure to come in at 0.2%, according to Melek. “We’ve been hanging our hat on the retail numbers, saying U.S. economy might be slowing,” he said.

The CPI number will also be important this coming Thursday, especially the core figure, which the markets are projecting to be at 2.3% on an annual basis in August. “Any negative data now, should help gold out,” Melek stated.

After all the new data are digested, the Fed might still end up disappointing the markets on Sept. 18, warned Capital Economics markets economist Simona Gambarini.

“We expect the Fed to ease monetary policy. But, because of what’s already been priced into the markets, which is at least four 25-basis-point cuts in the Fed target rate, we think that expectations have gone a bit too far,” Gambarini explained.

Currently, the markets are pricing in a 93.5% chance of a 25-basis-point cut in September and a 6.5% chance of no cut at all, according to the CME FedWatch Tool.

Another critical event next week will be the European Central Bank meeting on Thursday with markets expecting a rate cut along with some new stimulus package.

“The ECB will be talking about potential recession and taking steps. If yields in Europe drop here that also applied downward pressure on the U.S,” Melek pointed out.

Streible highlighted gold in euro terms as the thing to watch next week. “At the last meeting, they indicated that they were getting ready to release ‘bazooka’ of stimulus, which could continue to put pressure on the euro currency. Gold in euro terms might be really what we need to watch,” he said.

Gambarini, on the other hand, said that the ECB might not be as aggressive as markets are anticipating. “We do have a rate cut in September priced in and we do have the ECB restarting QE later this year. But, the market is currently forecasting QE and pricing in more rate cuts. That is the reason why we are not more positive on gold prices,” she said.

Technical levels to watch

Gold bulls are still very much in control of the gold market, said Kitco’s senior technical analyst Jim Wyckoff.

“A three-month-old uptrend is in place on the daily bar chart. Bulls’ next upside price objective is to produce a close in October futures above solid resistance at $1,600.00 … First resistance is seen at the overnight high of $1,528.50 and then at 1,535.00. First support is seen at the overnight low of $1,510.70 and then at $1,500.00,” Wyckoff wrote.

Melek is looking at $1,480 an ounce on the downside and $1,557 an ounce on the upside.

Streible pointed towards the 20-day moving average as a very good gage when it comes to identifying support levels in gold. “The 20-day moving average is currently critical support at $1,529.30,” he said.

Long-term outlook

Taking a slightly longer-term outlook, Capital Economics is projecting for gold to end the year around the $1,500 levels as two forces balance each other out. On the one hand, risk aversion is expected to continue to support gold. But, bond yields are projected to recover, which will put pressure on gold.

“We expect risk aversion for the rest of the year, which should support demand for gold. In particular, we expect stock markets in the U.S. and the rest of the world to sell-off by the end of the year. On the other hand, because bond yields have already fallen so much, we expect them to head higher for the rest of the year, which should put downward pressure on gold,” Gambarini told Kitco News on Friday. “On balance, we think that the gold price will stay at current levels for the rest of the year.”

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