Gold’s Luster at Risk as Fed Testimony Looms

San Francisco (Feb 6)  Gold prices rallied for a third consecutive week with the precious metal advancing more than 3.5% to trade at 1157 ahead of the New York close on Friday. The advance comes alongside a sharp sell-off in the greenback with the Dow Jones FXCM U.S. Dollar Index (Ticker: USDOLLAR) down 1.3% on the session. Risk sentiment remains fragile amid massive back-to-back swings in the major equity indices, fueling demand for the yellow metal.

The U.S. Non-Farm Payrolls report on Friday came shy of expectations with print of 151K for the month of January. Despite the miss however, an uptick in the labor force participation rate coupled with stronger than expected wage inflation number and a surprise downtick in the headline unemployment rate sent the dollar higher as gold pulled back from a critical confluence resistance range. 

Looking ahead to next week, the focus will be on Federal Reserve Chair Yellen as she takes the stage at the semi-annual Humphrey Hawkins testimony. As global conditions continue to tighten, persistent weakness in energy prices & slow inflation may delay the central bank’s expectations for higher interest rates in 2016. Investors will be dissecting Yellen’s comments for clues as to where the committee stands with regards to the magnitude & timing of future interest rate hikes amid the ongoing turmoil in global equity markets & falling commodity prices (save gold).

Retail Sales & the preliminary February Michigan Sentiment surveys next week will also an important update on the health / status of the U.S. consumer. For gold prices, the recent rally is at risk as prices look to close the week just below critical resistance. 

Last week we noted that, “Ongoing technical divergence (in USDOLLAR) continues to suggest the greenback remains vulnerable- with bullion standing to gain from dollar softness.” Indeed gold prices rallied the entire week, marking a consecutive 5-day advance (1st time since March & that was a 6-day stretch). Nearly every time we’ve seen this play-out, prices saw a brief pullback before resuming higher, suggesting that next week we should be looking for a weakness early in the week to offer more favorable long entries. 

From a technical standpoint, gold tested a critical resistance zone on Friday at 1156/60 where the 78.6% retracement of the October decline converges on basic trendline resistance extending off the May high, the operative upper median-line parallel extending off the December high & former trendline support (July low), turned resistance. TheImmediatelong-bias is vulnerable near-term while below this threshold. 

Interim support rests at 1135/36 backed by the 200-day moving average at 1130. Key support & our bullish invalidation level is now raised to 1112/16. We’ll be looking for long-triggers on a pullback with a breach above key resistance targeting a Fibonacci confluence at 1176/77. Subsequent objectives eyed at 1200 and the 61.8% retracement of the 2015 range at 1207.

Source: DailyFX