Gold Prices Surge to 6-Year High But Gains May Be Fleeting

GOLD & CRUDE OIL TALKING POINTS:

• Gold prices surge to 6-year high as Fed rate cut bets continue to swell

• Follow-through may be fleeting as haven demand buoys the US Dollar

• Crude oil prices may turn lower on downbeat Eurozone, US PMI data

Gold prices have surged to a six-year high, building on a move started in late 2018 against the backdrop of deteriorating Fed rate hike bets. It is hardly surprising then that the latest leg of the rally came in the wake of an FOMC monetary policy announcement that the markets took to mean that easing is imminent.

The move higher has picked up impressive momentum. Indeed, yesterdays rise marked the largest one-day advance since mid-October 2018. Yet, the metal might find itself on the defensive before long if everything the markets now seem to believe about the macro landscape proves to be broadly correct.

Swelling rate cut expectations understandably follow from a slowdown in global growth since the beginning of last year. This might explain why evaporating Fed rate hike prospects have not brought down the US Dollar. It has tellingly gained alongside other anti-risk assets, like the Yen and Treasury bonds.

This seems to suggest the markets are positioning for systemic stress ahead. In fact, the degree of stimulus now priced into Fed Funds futures implies dire times indeed: in addition to ending its QT balance sheet reduction effort, the US central bank is now seen delivering a hefty 75bps in cuts by year-end.

If markets are right, on-coming liquidation is likely to put a greater premium on the Greenbacks unrivaled liquidity, replaying the rapid rise in the second half of 2008. If they are wrong, a hawkish revision to the prevailing monetary policy outlook might drive USD higher. Anti-fiat gold is at risk either way.

EUROZONE, US PMI DATA MAY REVIVE GLOBAL SLOWDOWN WORRIES

Traders may not have to wait long for these dynamics to begin emerging. Incoming Eurozone and US PMI data will offer a timely look at economic activity trends for two of the worlds top growth engines. A string of recent disappointments warns of further deterioration.

Soft outcomes might remind the markets why global central banks have scrambled unison to the dovish side of the spectrum. If haven flows boost USD in this scenario, gold gains might hit a wall. Meanwhile, cycle-sensitive crude oil prices may fall with stocks, although building US-Iran friction could cap losses.

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GOLD TECHNICAL ANALYSIS

Gold prices are menacing the underside of a support-turned-resistance at an upward-sloping barrier set from December 2016, now at 1413.76. The August 2013 high at 1433.85 follows thereafter. The March 2014 swing high at 1392.08 marks immediate support, with a move below that eyeing the July 2016 top at 1375.15.

CRUDE OIL TECHNICAL ANALYSIS

Crude oil prices rose to test resistance in the 57.24-88 area. A daily close above that targets the 60.39-95 zone next. The lower layer of immediate support is at 54.55, with a reversal back below that opening the door to challenge the 50.31-51.33 region once again.

COMMODITY TRADING RESOURCES

• See our guide to learn about the long-term forces driving crude oil prices

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• Join a free webinar and have your commodity market questions answered

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com