The markets are tricky to master at the moment, especially if you trade multiple asset classes. Commodities are falling sharply including gold and Brent crude oil today, stocks continue to extend gains, their fourth straight gain in a row, while the dollar is lower and EURUSD tested 1.31 earlier, its highest level since mid-October.
Can the gold price be saved by Indian nuptials?
The dichotomy between commodities and the FX market is interesting. Earlier this year we saw commodity markets lead other markets lower for example back in March when risk sentiment started to sour. Thus, the decline in gold below $1,700 is worth keeping an eye on. The yellow metal is already below its daily cloud base at $1,702, which is the start of a technical downtrend; a further decline below $1,660 - the 200-day sma- would be another bearish development for the yellow metal that may signal a steeper decline in the medium term. However, we think the $1,650 level may attract some buying interest as bargain hunters may be motivated to pile up on the metal ahead of the start of India's wedding season in early January, which can boost demand for gold. Thus, we expect this cross to be fairly volatile during the coming month.
For now, though, gold may be sold off in anticipation of a slightly more hawkish FOMC next week than many in the market currently expects. The majority of opinion is looking for an extension of QE3 (or QE infinity as some are calling it) to make up for the end of Operation Twist. But if the Fed does not deliver another $40 billion of Treasury purchases per month then we may see stocks sell off and the dollar start to recover. If the Fed does as expected, then we may see the gold price embark on another leg lower.
The problems with the dollar
There are a couple of things weighing on the dollar right now, but the most important, in our view, is the weakness in economic data. We saw the manufacturing ISM buck other nations and collapse in November back to contraction territory below 50. The focus is on the service sector ISM released tomorrow and then the all-important payrolls report on Friday. If both of these data points are weak then we could see the dollar extend declines. However, if we get some positive data surprises then we could see some volatility in the greenback and see it recover some of its recent losses. Thus, we expect dollar crosses to be very sensitive to fundamental data releases this week.
Falling Spanish bond yields help to boost the euro
The euro is taking the lead from Spanish and Italian bond yields. Yields on 10-year bonds have continued to fall and are now 5.25% in Spain and 4.4% in Italy. The fall in bond yields may not be boosting the real economies' in these member states as yet, but they are helping to support the single currency as they make a rate cut at this week's ECB meeting less likely. That is helping to keep the euro supported, especially vs. the dollar as the Fed is expected to reiterate its highly accommodative monetary stance at its meeting next Wednesday.
GBP bulls should watch out for Osborne tomorrow
The pound has been following the euro higher and is above 1.61 today. While tomorrow's autumn budget statement has been well sign posted for days and the bad news on the public finances are well known by now, we would still expect some volatility in the pound ahead of the Chancellor's speech tomorrow at 1230GMT/ 0730 ET. Any weakness could be bought into and we may see a move back to the 1.63 highs of the year, although this is a formidable resistance level and could stymie the bulls.
AUDUSD has mostly treaded water in the London session after bouncing post the RBA rate cut as the market sold the rumour and bought the fact. A break above 1.0490 would be a bullish development for this cross and may open the way to 1.0600.
Event risk heats up
The data calendar has been fairly light today and the market has mostly dismissed the stalling of banking union talks in the currency bloc. As we move towards the middle of the week the fundamental picture gets more interesting with the UK's autumn budget statement tomorrow and global service sector surveys, then the ECB and BOE meetings on Thursday and NFP data on Friday.
One to watch: Gold daily chart
The yellow metal may find support at $1,660 - the 200-day sma, after a sharp fall on Tuesday. We expect gold to be bought on dips in anticipation of a boost to demand ahead of the Indian wedding season that gets under way early next year.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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