More Stimulus from the ECB
Today’s big fundamental factor came from the ECB’s decision to cut its benchmark interest rate from 0.25% to a new record low of 0.15%. The bank also moved the deposit rate from 0% to -0.10% in order to stimulate lending. On top of low interest rates, the ECB is also moving in the direction of large scale QE. Draghi already noted it will stop sterilizing the SMP, which has similar effects of QE.
QE essentially adds currencies to circulation in an attempt to improve liquidity and stoke lending. When fiat currencies increase in supply, gold usually gets a boost. This was the case today as traders push gold above a recent tight consolidation.
The 4H chart shows support near 1240.50. After the ECB announcement and press conference, gold broke above this week’s high, establishing a short-term price bottom.
While the reaction was sharp, it should be noted that the prevailing trend has been bearish. The most recent technical development was a bearish break from triangle, before which the market was also bearish.
Bearish Continuation Scenario:
The current rally will likely see some resistance around 1260-1261, a previous support/resistance pivot. If the market falls back below 1250, the outlook remains neutral-bearish in the short-term.
If price falls below 1240, the 1200 handle down to the 2014-low of 1183 will be the next levels to focus on.
Bullish correction Scenario:
If gold stays north of 1250 after a pullback, there is still bullish correction risk. The upside risk is limited to the 1290-1300 area, middle of the broken triangle, and where the moving averages (200,100, 50) are clustered. Below 1300, the daily chart of gold looks neutral-bearish.
A break above 1300 however can open up a bullish scenario scenario, and not just as a correction. It opens up the 1325-1330 area, the top of the triangle.
The US jobs report tomorrow will be key to direction of gold. Though the ECB is preparing for more stimulus, the Fed has been reducing stimulus, and looking to hike rates in 2015. Positive NFP data should move the prospect of rate hike sooner rather than later, which should take away some demand for gold, and keep the bearish bias we saw in the 4H and daily chart.
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