Markets have commenced the week with an unexpected start following a spectacular drop in Gold during the Asian session that sent the yellow metal to a new milestone five-year low at $1080. Gold dropping so sharply is a surprise and while the reports that China Gold reserves were half the expected level might have inspired additional selling pressure, it is the repeated comments of commitment from the Federal Reserve that they will begin raising US interest rates at some point this year that have continuously pressured Gold in recent months. Despite all the Greece uncertainty, we saw a complete lack of buying interest towards Gold and I believe this spelled out to investors that there is much hesitation to purchase Gold as we approach the timing of a US interest rate rise and consequently inspired further bearish momentum.
Dropping below $1100 is a huge psychological move in Gold and if we close daily trading below this level, it extends the outlook for further falls. Having said that, sell-on rallies has been the name of the game when it comes to Gold trading for at least the past couple of months and even if Gold does manage to recover its unexpected losses investors are probably looking at another future selling opportunity. When you take into account that the Greece uncertainty was unable to promote any increased buying interest in Gold, it will require a swerve from the Federal Reserve when it comes to raising interest rates to encourage substantial gains. Given that US economic data is continuing to improve and Janet Yellen is also repeating on a regular basis that US interest rates should begin to move later this year, both the mid-term and long-term outlook for Gold remain bleak.
Following the somewhat surprising comments from BoE Governor Mark Carney that UK interest rates might begin to rise at the turn of the year, Sterling bulls will be optimistically hoping for further encouraging comments about rises in UK interest rates when the latest BoE minutes are released on Wednesday. While the GBPUSD and GBP in general manage to bounce higher on the upbeat comments from the BoE Governor, I remain hesitant about expecting UK interest rates to move anytime soon. Not only do UK inflation levels remain depressed, but any announcement of a possible UK referendum for some point in 2016 would also encourage the central bank to leave interest rates unchanged.
I would also keep an eye on whether the EURGBP continues to fall because any hawkish comments from the BoE on interest rates would accelerate a decline in this pair and probably put UK exports at risk. Eurozone weakness is another factor that could delay the BoE from raising UK interest rates regardless of how attractive the UK economic outlook is and I wouldn’t actually be surprised to see Carney retreat once again on his interest rate comments (like he did in 2014) bearing in mind that the Euro currency has resumed its downtrend against its trading partners.
Speaking of the Euro, the close against the Dollar below 1.10 was a strong selling signal that was repeatedly pointed out and has inspired the EURUSD to fall to two-month lows at 1.0819. I still believe a move to parity in the Eurodollar is possible for 2015 and now that the EURUSD has cleanly fallen below its psychological 1.10 support, we are looking at the potential for further falls. The EU economic outlook has not changed and I think that the currency needs to remain under 1.10 against the Dollar for both export competiveness to be enhanced and for troublesome inflation prospects to improve. 1.10 will now be seen as strong resistance and investors will enjoy selling opportunities on any gains in this pair until the EURUSD manages to close above 1.10 once again.
Now that the USDCHF has finally managed to surpass the 200 Moving Average that was previously capping USDCHF gains on a repeated basis, the pair has managed to climb to a three-month high at 0.9632. The bulls have spotted the green light to price in further advances and bearing in mind that the SNB has also confirmed they are repurchasing the Euro at the same time the Euro is resuming its downtrend, the prospects for the USDCHF are bullish. It is also important to take into account that the SNB remain explicit that the CHF is overvalued and will likely ease monetary policy further during the upcoming quarter, which further increases the outlook for a stronger USDCHF.
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