Gold will choose its way

The stabilization of gold on the eve of the announcement of the FOMC meeting's results reminds us of the calm before the storm. The precious metal has always been sensitive to the Federal Reserve's decisions, and now it does not know how to behave because the US central bank's position is not as transparent as investors would like. The acceleration of US GDP to 3.2% in the first quarter suggests the idea of a possible resumption of the monetary policy normalization cycle in order to prevent the economy from overheating. On the contrary, sluggish inflation allows CME derivatives to increase the chances of reducing the federal funds rate by at least 25 bp in 2019 to almost 70%. Which way will the Fed choose?

The fate of many financial assets depends on the regulator's decision. If Jerome Powell hints at monetary expansion, the US dollar will weaken and gold, on the contrary, will strengthen. The Fed chairman's optimism and his belief in a rate hike, if not in this, and next year may directly lead to opposite results. The precious metal is highly dependent on the US currency. This assures its rapid rally in January, followed by a close in the red zone for three consecutive months. At the beginning of the year after the Fed changed its outlook, investors were betting on weakening the dollar, but the divergence in the economic growth of the US and other countries of the world, the high attractiveness of US-issued securities and dovish rhetoric of central banks and competitors of the Fed forced them to change their opinion.

At the same time, hopes for the end of the trade war between Washington and Beijing, the V-shaped recovery of China's economy, the growth of global demand and the recovery of German exports makes it possible for the euro to feel for the bottom. In the first quarter, eurozone GDP grew by 1.5%. This is less than its US counterpart, but we must understand that the American economy has accelerated due to a large-scale fiscal stimulus, and the effect of tax reform will gradually come to naught. At the same time, the countries of the currency bloc can afford fiscal stimulus, which will accelerate GDP.

The dynamics of the US GDP and the eurozone


Strong statistics on the European economy reduces the likelihood of a generous LTRO from the ECB. Frankfurt does not have to weaken monetary policy if the currency bloc is not as bad as is commonly believed. This circumstance makes it possible for us to count on the growth of the EUR/USD quotes, the correction of the USD index and gives optimism to the bulls on gold.

Along with a strong dollar, precious metals also have problems with stock indices. The US stock market rewrites record highs, the global risk appetite is high, and in such circumstances, safe haven assets feel at ease. On the other hand, the low rates of the US debt market support the bulls on AUD/USD. Gold is waiting for clues from the Fed in order to understand in which direction the financial markets will move, and finally choose their own path.

Technically, the task for bulls on the precious metal is to lock in its quotes within the short-term consolidation range of $1282-1310 per ounce. In this situation, the chances of activating the "Wolfe Wave" pattern will increase. Its first target is located near the $1,330 mark.

Gold daily chart

The material has been provided by InstaForex Company -