Gold – 4 Scenarios in Trading the FOMC Risk

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Gold - 4 Scenarios in Trading the FOMC Risk

Gold (xau/usd) has been consolidating in October, and continues to do so ahead of this week’s FOMC decision and announcement. Let’s take a look at how we can assess the FOMC-reaction for an outlook for the upcoming month.

Gold (XAU/USD) 4H Chart 10/29
gold 4h chart 10/29

(click to enlarge)

Gold has shifted from a bullish correction (1183-1255) into a sideways consolidation between roughly 1222 and 1236. Note that price has broken below October’s rising speedline, and the 4H RSI has broken below 40 to show loss of October’s bullish momentum. Another sign that directional bias has been neutralized is that gold is now trading within the cluster of 200-, 100-, and 50-period SMAs.

A couple of spikes this week created the 1222-1236 range, which sets up a nice range for a breakout signal.

Scenario 1: Now, the FOMC is expected to complete tapering of QE. If this does not happen, the USD will likely fall across the board, and gold is likely to be bullish. If this is the case, and gold breaks above 1236, we should expect a rally toward 1255, with further upside risk towards the next key area. In the daily chart, we can see 1270-1280 as a common support/resistance area, which might also be reinforced by a falling trendline.

Gold (XAU/USD) 4H Chart 10/29
gold daily chart 10/29

(click to enlarge)

Scenario 2: If the FOMC does complete tapering, the key focus will immediately shift to whether the forward guidance still projects a mid-2015 rate hike. This is where central bank watchers will look for tone. If the tone becomes more wary of increasing global uncertainty and vulnerability of the US recovery, we might see expectations for a later rate hike. In this scenario, the USD might also fall across the board, and we should also be looking for a break above 1236 to confirm further bullish correction in gold. However, compared to the scenario above, we can have more anticipation of a pullback. If price then can hold above 1230, the bullish correction scenario would still be in play. But if price falls back below 1230, we should consider the reaction non-directional, and look for more clues before formulating an outlook.

Scenario 3 (most likely): If the FOMC completes QE, and the language is similar to previous statements, the USD has a good chance to continue its trend before October (bullish), and gold will likely be bearish. This is the most likely scenario, where we should be looking for a break below 1222. However, because this won’t be a surprise, we should also monitor the 1230 for resistance on a pullback.

Scenario 4 (least likely): The least likely scenario is the Fed considering an even earlier rate hike, which should send the USD higher, and gold should break below the consolidation with low likelihood of a pullback as it will likely hurry back towards the 1183 October-low, which is just above the 2013-2014 lows around 1180.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.