Golden week review: dollar long hair! Gold plunged nearly $89 this week. Next week’s big non-farm hit!

As the dollar rebounded strongly, gold suffered heavy selling this week. Hawkish comments from Federal Reserve officials this week spurred a surge in the dollar, which was a major factor in the gold price rout. It is also bearish for gold as rising coVID-19 cases and uncertainty over the next round of US stimulus drive investors into the dollar as a safe haven. Next week investors are bracing for heavy data such as the US presidential debate and the NON-farm report, which are expected to trigger fresh market volatility.

For the week, spot gold closed at $1,860.53 an ounce, down from an intraday low of $1,848.60. Gold finished the week down nearly $89, or 4.55%.

Hawkish comments from Fed officials spurred a surge in the dollar

Chicago Fed President Charles Evans was the trigger for the dollar’s rally on Tuesday, putting significant downward pressure on gold prices. In a speech Tuesday, Mr. Evans suggested the Fed could raise its benchmark interest rate sooner than expected. The Fed’s benchmark interest rate is currently between 0% and 0.25%.

“We can start raising interest rates before the average gets to 2 per cent and we need to talk about that,” Mr Evans told a discussion organised by the international economic policy forum OMFIF.

Mr Evans said that without another package of fiscal support, the US economy risked a longer and slower recovery or even an outright recession. Mr Evans also said he did not believe open-ended quantitative easing was an important part of the solution.

The comments sent expectations of a fed rate hike soaring and sent the dollar index above 94 for the first time since July 28. The dollar rallied as high as 94.75 this week, its highest level in two months, and the dollar index.DXY posted its biggest weekly gain since early April.

Erik Nelson, macro strategist at Wells Fargo Securities, said: “All we’ve heard from the Fed over the past few months is that we’re not going to raise rates for the foreseeable future. Then Evans came in and challenged that, so the market was caught off guard.”

“Evans’ comments are very hawkish,” said Edward Moya, senior market analyst at OANDA in New York. He mentioned a pause in quantitative easing and interest rate increases until the inflation target was reached. That took the market by surprise. “The sooner we get to the other end of the virus, the sooner we will see expectations of rate hikes rise, which should further fuel the dollar rally.”

“The dollar is staying strong, which is fundamentally depressing gold prices,” said Chris Gaffney, President of World markets at TIAA Bank.

Federal Reserve Chairman Jerome Powell said on Capitol Hill this week that while the U.S. economy has’ significantly improved ‘since the novel Coronavirus pandemic plunged it into recession, the road ahead remains uncertain and the Fed will take more action if necessary.

In addition to comments from Fed officials, the dollar was also driven higher by safe-haven buying after a rise in novel Coronavirus infections in Europe led to restrictions and concerns.

Naeem Aslam, chief market analyst at AvaTrade, said the main reason for gold’s fall this week was the stronger DOLLAR. Mr Aslam said the Weakness in gold was amplified by the Fed’s “monetary policy turmoil causing the DOLLAR index to climb”.

The dollar has been the main catalyst for gold’s decline this week, said Charlie Nedoss, senior market strategist at LaSalle Futures Group in New York. “The dollar is key and the dollar continues to rise… Gold is at its 100-day moving average and I think that’s support.”

Uncertainty surrounds the next round of US stimulus

The lack of progress on a fiscal stimulus deal in Washington has investors worried about the OUTLOOK for the U.S. economy, which has also pushed the dollar higher, weighing on gold prices.

Congress has been deadlocked for weeks over the size and form of a fifth coronavirus response bill, which has already passed about $3 trillion and become law.

David Meger, head of metal trading at High Ridge Futures, said the death of U.S. Justice Ginsburg is expected to create more divisions between Democrats and Republicans, making an economic stimulus package less likely.

“Republicans and Democrats are in agreement on some stimulus, but they’re not sure how much, and that uncertainty is driving investors toward the dollar,” said Edward Moya, senior market analyst at OANDA in New York.

Democrats in the U.S. House of Representatives are working on a $2.2 trillion coronavirus stimulus package that could be voted on next week, a key lawmaker said.

George Gero, managing director of Royal Bank of Canada Wealth Management, said it was not surprising to see a lot of selling in the gold market because of a combination of factors. He noted that the threat of a second wave of blockades was dragging down economic growth, which in turn was dragging down the stock market.

Gero added that concerns are now more serious because investors are not holding out much hope for new stimulus measures to protect the economy. He added that if no new stimulus measures were announced, gold prices would continue to struggle.

“The chances of Congress agreeing on any stimulus package by January are getting closer to zero,” said Tai Wong, head of base and precious metals derivatives trading at BMO.

Edward Meir, an analyst at ED&F Man Capital Markets, said in a note that gold prices have been driven by successive rounds of stimulus and that the U.S. stimulus has stopped — at least for now — and appears to have halted the gold rally.

Technical surface break

In addition to the dollar, the cause of the collapse in gold prices is also a technical breach. Spot gold broke through the important support level of $1,900 an ounce on Monday.

After briefly climbing back above the 1990 dollar level on Tuesday, it fell again on Wednesday and Thursday, particularly Thursday, when it hit a new low of $1,848.60, a level not seen since July 22. Friday’s rally was followed by a retreat to close near $1,860 an ounce.

Next week, analysts will be watching the technical side to see if the gold sell-off is over.

Suki Cooper, precious metals analyst at Standard Chartered Bank in New York, said if gold does not find solid support around $1840 next week, it could fall below $1,800 before the decline ends.

“Gold has sold off, breaking below the key support level of $1,950 / ounce and testing support around $1,840 / ounce,” Cooper explained. If prices fall below this technical level, support won’t appear until the early July low around $1,760 an ounce. Gold is approaching oversold territory.”

Uncertainties surrounding the U.S. election, novel Coronavirus and economic recovery are prompting investors to cash in ahead of the election, causing wild swings in all markets, said Peter Hug, head of global trading at Kitco Metals.

Hug said gold appeared to be forming strong support at $1,850 an ounce. But if that level breaks, $1,820 could be the next level of support. In the upward direction, initial resistance is at $1875, then $1900.

Us presidential debate and non-farm report hit

The first televised presidential debate in the United States is set to take place next week and is sure to trigger more market volatility. The debate could affect the dollar, which in turn could affect gold’s performance.

Foreign exchange strategists at ING said the post-debate poll would be closely watched.

“The highlight of the coming week will undoubtedly be the first presidential televised debate on Tuesday night in Cleveland,” ing strategists said. Polls show Mr. Biden with a 7 percent lead, and he will face a tough test from President Trump, who usually performs strongly at such events. One view is that Mr Trump’s strong performance is good for stocks and bad for the dollar. “We believe that if Biden wins, with a good worldview, the dollar is likely to fall in 2021.”

The most important US data to watch next week will be Non-farm payrolls for September, due on Friday, which will be the last monthly employment report before the November presidential election. Recent claims for jobless benefits show that the U.S. economy’s recovery from the new coVID-19 epidemic is losing momentum as government aid flows dwindle.

The median forecast from economists is for U.S. nonfarm payrolls to rise 865,000 in September, well below August’s 1.371m, while the unemployment rate edged down to 8.2 per cent from 8.4 per cent.

Other important data to watch include Wednesday’s ADP employment data, second-quarter gross domestic product and pending home sales, as well as Thursday’s jobless claims, THE PCE price index and the ISM manufacturing PMI.

In terms of important speeches, European Central Bank President Christine Lagarde will appear before the European Parliament at 21:45 Beijing time on Monday.

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