Gold Price Forecast Hinges on Fed Rhetoric, Trade Deal Drama

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GOLD PRICE FORECAST MIRED BY FED CHAIR POWELL SPEECH & US-CHINA TRADE DEAL UNCERTAINTY

  • Gold price outlook remains favorable but the precious metal might face bearish headwinds
  • Gold volatility could get a jolt from Jerome Powell during a scheduled speech next week if the Fed Chair discusses FOMC appetite for negative interest rates
  • Bullion demand has potential to keep gold prices supported amid lingering coronavirus recession risk and US-China trade tension

Gold price action oscillated within a 2.5% trading range over the last five sessions only to finish flat on the week. Broadly speaking, spot gold (XAU/USD) has clung onto the $1,700 price zone for the last month while the precious metal consolidates and awaits another catalyst to spark its next big move.

Gold
BULLISH

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of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily -3% 6% -1%
Weekly 0% 10% 3%

Despite recent turbulence, gold performance is up about 10% year-to-date, and still has potential to climb higher. Gold price outlook remains upbeat as liquidity gushes amid staggering central bank balance sheet growth.

WEEKLY GOLD FORECAST – NEUTRAL

In consideration of waning demand for safe-haven assets, however, gold prices might face protracted downward pressure if the improvement in market sentiment is sustained. Also, according to the economic calendar, there are several speeches from FOMC officials scheduled for next, which have the possibility of weighing materially on gold price action.

GOLD PRICES EYE FEDERAL RESERVE BALANCE SHEET GROWTH, NEGATIVE INTEREST RATES

Chart created by @RichDvorakFX with TradingView

The price of gold has skyrocketed more than 15% since March 23 when the Federal Reserve announced plans to buy Treasury securities “in the amounts needed.” This has accompanied “large-scale” overnight and term repurchase agreement operations conducted by the FOMC. The prospect of unlimited Fed asset purchases has provided a boost to gold prices, which is primarily owed to the precious metal’s anti-fiat characteristics.

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Gold has struggled to extend its advance more recently, however, as Federal Reserve balance sheet growth begins flattening from a near-vertical trajectory. This headwind has potential to keep pressuring gold prices lower.Yet, following the latest FOMC rate decision, commentary from Fed Chair Powell noted how the central bank may need to do more and augment its monetary policy arsenal once again.

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On that note, market participants might place a great deal of importance on an upcoming Fed Chair Powell speech this Wednesday, May 13 at 13:00 GMT. Powell could make mention of fresh record lows recorded by the US 2-Year Treasury yield last week as implied Fed fund futures turned negative.

Several FOMC officials have voiced opposition to negative interest rate policy (NIRP) in the United States, but the central bank has a history of capitulating to dovish expectations priced by the bond market. Correspondingly, language from Fed Chair Powell toward negative interest rates stands to be scrutinized closely, which could catalyze significant gold volatility in response.

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GOLD VOLATILITY IN FOCUS AMID REKINDLED US-CHINA TRADE DEAL UNCERTAINTY

Gold Price Forecast Hinges on Fed Rhetoric, Trade Deal Drama

Chart created by @RichDvorakFX with TradingView

Gold price action going forward could also hinge largely on US-China trade deal uncertainty. The Sino-American trade war was a major market theme placed on the backburner late last year that looks set on returning to the spotlight – perhaps with an additional layer of complexity.

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This follows coronavirus outbreak accusations recently lobbed back and forth between leaders of the world’s two largest economies. Also, seeing that Chinese imports of US goods have fallen far short of purchase commitments that were pledged in the phase one trade deal, there is an outstanding threat President Trump echoes his renewed tariff threat.

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That said, as market sentiment hangs in jeopardy amid reintroduced US-China trade tension, there is potential that gold remains relatively supported. Likewise, gold prices have potential to extend higher if the Chinese Yuan experiences another breakdown, or spot USD/CNH price action explodes higher, on the back of further US-China trade war escalation.

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— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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