Gold Price Forecast: dovish Fed expectations and golden cross favors strong move above $1,300
London (Jan 26) Gold is currently trading at $1,300; up 1.4 percent on the week.
The yellow metal printed a three-week low of $1,276 on Monday, validating the bearish view put forward by the contracting triangle breakdown of last Friday.
As a result, the metal was expected to test $1,265 in the short-run (support of the trendline trending north from November lows).
The follow-through to Monday's bearish move, however, has been anything but bearish. Moreover, the metal managed to defend $1,280 on a closing basis in three days leading up to Thursday and has jumped to $1,300 today, invalidating the contracting triangle breakdown.
The big gains seen today are likely a product of dollar weakness. The dollar index, which tracks the value of the greenback against majors, is currently seen at 95.85 – down 0.66 percent on the day.
Moreover, the slide in the greenback could be associated with the following factors:
Political tensions in Washington: Roger Stone, a former advisor to Donald Trump, was arrested in Florida earlier today on charts of lying about his cooperation with Wikileaks during the 2016 Presidential Elections and about his relationship with the Trump campaign. His arrest has complicated matters for President Trump.
Dovish Fed: A Dow Jones Newswires report said the central bank could stop the unwinding of its massive securities portfolio sooner-than-expected.
Haven demand due could have also accentuated bullish pressures around the yellow metal. The IMF revised lower its global growth forecast for 2019 earlier this week citing the weakening of demand conditions in Europe.
Further, the European Central Bank's "Survey of Professional Forecasters" also trimmed their 2019 and 2020 Eurozone growth forecast to 1.5 percent from the previous forecast of 1.8 percent and 1.6 percent, respectively.
Looking ahead
The Dow Jones Newswires report on the possibility of Fed halting the balance sheet normalization process sooner-than-expected has likely reinforced the dovish Fed expectations – the tightening cycle has ended and the Fed won't raise rates this year.
As a result, USD could remain on the defensive, pushing gold well above $1,300 in the runup to next Wednesday's Fed decision.
If the Fed sounds more dovish than expected, then the bullish move in the yellow metal could gain further traction.
The metal bears, however, would make a strong comeback if the Fed sounds less dovish than expected.
Other factors like Trump's political complications, Brexit uncertainty, trade tensions and heightened fears of global growth slowdown also favor upside in the safe-haven metal.
The price chart analysis also indicates that the path of least resistance is to the higher side.
Daily chart
As seen above, gold has confirmed bull flag breakout with a move to $1,300. That pattern usually ends up accelerating the preceding move. Put simply, the doors have been opened for a rally to $1,359 (target as per the measured moe method, that is, pole height added to breakout price).
Validating that bullish setup is the golden crossover (a bull cross between the 50- and 200-day moving averages) and the higher lows, as represented by the rising trendline.
The falling channel breakout on the 14-day relative strength index (RSI) also supports the bullish argument.
View
The yellow metal risks rising to $1,321 (78.6% Fib R of 78.6% Fib R of $1,365/$1,160). Further gains could be seen if the Fed confirms the tightening cycle has ended.
The bullish case would weaken significantly if the Fed sounds less dovish than expected. A move below the ascending trendline would confirm a near-term top.
FXstreet
