Gold Price Forecast Hinges on Fed Rate Decision, Policy Outlook

Fundamental Forecast for Gold:Neutral

• Gold reverses from yearly highs- monthly opening-range break to offer guidance
• What’s driving gold prices? Review DailyFX’s 3Q Gold Projections

Gold prices snapped a three week winning streak with the precious metal down 1.72% to trade at 1323 ahead of the New York close on Friday. The losses come alongside a rebound in the USD and Treasury yields despite expectation the FOMC will hold rates next week.

All eyes will be on Janet Yellen & Co next week when the Federal Reserve holds its quarterly interest rate decision on September 20th. Markets will be closely eyeing the fresh quarterly projections from Fed officials as they pertain to growth, employment and interest rates. In the wake of hurricanes Harvey & Irma, central bank doves may argue to further delay the normalization cycle with the dollar likely to face further headwinds if the committee opts for a shallower path for interest rates.

Gold has been well-supported over the past few months on persistent weakness in the greenback and rising geo-political tensions and that’s not likely to end anytime soon. That said, prices responded to structural resistance this week and although the pullback may have a bit further to go, the broader outlook for bullion remains constructive.

• A summary of IG Client Sentiment shows traders are net-long Gold - the ratio stands at +2.28 (69.5% of traders are long)- bearish reading
• Long positions are 12.4% higher than yesterday and 15.8% higher from last week
• Short positions are 10.8% lower than yesterday and 23.9% lower from last week
• We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Spot Gold-bearish contrarian trading bias.

Gold Daily

Last week we highlighted that, “While the rally in gold has been quite impressive, prices are now approaching some longer-term objectives and even though the broader focus remains constructive, heading into next week the risk remains for some corrective price action before heading higher.” Indeed gold reversed off confluence resistance this week with the pullback now testing support at 1321/25 into the close of the week. Note that prices have now set a clean monthly opening-range just above basic trendline support and we’ll be looking for a break of this region for further guidance on the near-term outlook.

Gold 240min

A closer look at price action highlights the potential for a bull-flag formation here. Watch for support next week into the monthly opening-range low / lower parallel at 1316 with a breach of this near-term descending channel targeting 1355 & the 2016 high-close at 1366. A more significant Fibonacci consideration is eyed just higher at1377/79. A close below 1295/99 would be needed to suggest a more meaningful correction is underway.

Bottom line: prices need to stabilize at these levels if the broader uptrend off the July lows is to remain viable. Look for a definitive break of the monthly opening range heading into the Fed next week.