Gold Price Rebound from 50-Day SMA Intact Ahead of Fed Testimony

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Gold Price Talking Points

The price of gold appears to be stuck in a narrow range following the limited reaction to the Federal Reserve interest rate decision, and fresh remarks from Fed officials may keep the precious metal afloat as the central bank vows to “increase its holdings of Treasury securities and agency mortgage-backed securities at least at the current pace.”

Gold Price Rebound from 50-Day SMA Intact Ahead of Fed Testimony

The price of gold is little changed after tagging the 50-Day SMA ($1938) for the second time this month, and the precious metal may continue to track the monthly range as the update to the Fed’s Summary of Economic Projections (SEP)shows the longer run interest rate forecast unchanged from the June meeting.

In fact, the SEP suggests the Federal Open Market Committee (FOMC) is in no rush to alter the path for monetary policy even though the central bank plans to “achieve inflation that averages 2 percent over time” as officials cast an improved outlook for growth.

Image of DailyFX economic calendar for the US

It seems as though the FOMC will rely on its current tools to support the US economy as the “recovery has progressed more quickly than generally expected, and it remains to be seen if Chairman Jerome Powell will stick to the same script in front of Congress as the central bank head along with Treasury Secretary Steven Mnuchin are scheduled to testify on the Coronavirus Aid, Relief, and Economic Security (CARES) Act over the coming days.

Image of Federal Reserve balance sheet

Source: FOMC

In turn, more of the same from Chairman Powell may keep current market trends in place as the Fed’s balance sheet holds above $7 trillion in September, and the FOMC may continue to strike a dovish forward guidance at the next interest rate decision on November 5 as the committee remains “committed to using our full range of tools to support the economy in this challenging time.”

Until then, the wait-and-see approach for monetary policy may continue to heighten the appeal of gold as an alternative to fiat-currencies, and the pullback from the record high ($2075) may prove to be an exhaustion in the bullish trend rather than a change in market behavior as the price for bullion trades to fresh yearly highs during every single month so far in 2020.

Image of IG Client Sentiment

Looking ahead, the bullish trend in gold may continue to coincide with the crowding behavior in the US Dollar as the macroeconomic outlook remains largely unchanged following the Fed rate decision, with the IG Client Sentiment report showing retail traders still net-long USD/CHF, USD/CAD and USD/JPY, while the crowd is net-short GBP/USD, AUD/USD, EUR/USD and NZD/USD.

With that said, the technical outlook for gold remains constructive as it continues to rebound from the 50-Day SMA ($1938), with the moving average still tracking the positive slope from earlier this year, and the Relative Strength Index (RSI) may help to validate the continuation pattern established in August as the indicator appears to be bouncing back from its lowest reading since June.

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Gold Price Daily Chart

Image of Gold price daily chart

Source: Trading View

  • The technical outlook for the price of gold remains constructive as it trades to fresh yearly highs during every single month so far in 2020, with the bullish price action also taking shape in August as precious metal tagged a new 2020 high ($2075).
  • The price of gold cleared the previous record high recorded in September 2011 ($1921) even though the Relative Strength Index (RSI) failed to retain the upward from June, but the indicator registered a new extreme reading (88) for 2020 as the oscillator pushed into overbought territory for the third time this year.
  • In turn, theRSI sell-signalregistered in August could be indicative of a potential exhaustion in the bullish behavior rather than a change in trend as it breaks out of the downward trend, and the indicator may help to validate the wedge/triangle formation as the oscillatorappears to be bouncing back from its lowest reading since June.
  • Will keep a close eye on the RSI as it seems to have bottomed out in September, but need to see the oscillator to push towards overbought territory to indicate a bullish outlook, with a move above 70 likely to be accompanied by higher gold prices like the behavior seen in July.
  • Until then, the price of gold may continue to consolidate following the string of failed attempt to close below $1907 (100% expansion) to $1920 (161.8% expansion), but the rebound from the 50-Day SMA ($1938) may gather pace as the moving average continues to track the positive slope from earlier this year.
  • Still need a closing price above the Fibonacci overlap around $1971 (100% expansion) to $1985 (261.8% expansion) to bring the $2016 (38.2% expansion) to $2025 (78.6% expansion) region back on the radar, with the next area of interest coming in around $2064 (50% expansion) followed by $2092 (161.8% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong





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