Gold Price Forecast: Trapped in a bear flag ahead of Fed

New York (Dec 15)  Gold has created a bearish continuation pattern called an inverted bear flag on the weekly chart in the run-up to next week's FOMC rate decision.

It's been a rough year for the yellow metal. Having opened 2018 at $1,302, the metal rose to highs above $1,360 in April before falling sharply to $1,160 in August.

The US-China trade tensions, Fed tightening and EM instability, all pushed up the US dollar - gold's biggest nemesis - in five months to August.

In the last month or two, however, the EMS found some stability, the US-China trade tensions eased to some extent and dovish comments from Fed officials forced markets to begin pricing in the possibility of a Fed rate pause in 2019.

Gold, therefore, picked up a strong bid near $1,200 in mid-November and rose to a high of $1,250 earlier this week. As of writing, the zero-yielding safe haven yellow metal is changing hands at $1,238 - down 0.80 percent on the week.

Indeed, the metal is still up 6.7 percent from the yearly low of $1,160, but these gains could be trimmed before Dec. 31 if the Fed sounds hawkish next week.

The US central bank is widely expected to hike rates by 25 basis points to a range of 2.25 percent to 2.5 percent next week and signal a wait and watch approach for 2019.

A few months ago, Fed policymakers indicated they would probably increase interest rates three times in 2019. The market has never accepted the Fed's argument that three rate hikes in 2019 would be appropriate. Notably, even the two rate hikes that markets had priced in have been scaled back.

Essentially, the market is now expecting the Fed to pause rate hikes in 2019. Wall Street Journal (WSJ) did report earlier this month that the central bank is considering a wait-and-see approach and the December statement could carry that dovish change in the forward guidance.

To sum up, markets seem to have priced in a dovish turn in Fed expectations. Hence, gold may not benefit much from a potential rate pause in 2019.

On the other hand, the greenback will likely pick up a strong bid, sending the yellow metal lower if the Fed surprises markets by retaining the hawkish view on interest rates (or sounding less dovish than expected).

As seen above, the metal breached the trendline connecting the December 2015 and December 2016 lows in July and has charted a bearish flag ever since.

A bear flag breakdown, if confirmed on the back of hawkish Fed, could yield a drop below the psychological support of $1,300. An acceptance below that level would expose the yearly low support of $1,160.

The bearish pressure would weaken if the metal finds acceptance above $1,257 (200-day moving average).

FXstreet

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