Gold plunges as Fed revives June rate hike expectations


The article was written by Ipek Ozkardeskaya, Senior Market Analyst at FCA regulated broker London Capital Group Holdings plc (LON:LCG).

Ipek Ozkardeskaya, LCG

Gold recorded its biggest weekly loss since November, as the Federal Reserve (Fed) kept the June interest rate hike expectations alive at its April meeting. Gold was sitting on the critical $1’257/1’252 support (38.2% retracement on March – April rise / 200-day moving average) before the meeting. This support has been broken as the FOMC statement triggered a broad-based US dollar rally.

The price of an ounce tanked below 1’233, the major 61.8% retracement on March – April rise.

The MACD (Moving Average Divergence Converge) stepped into the bearish consolidation zone, reinforcing signs of a weekly bearish reversal.

Higher opportunity cost of holding gold could drive away investors

The FOMC maintained the interest rates unchanged as expected and delivered a more hawkish than expected accompanying statement. According to the Fed, the US consumer spending is solid, the business investment is firm and the inflation is “running close” to the policy target. US policymakers see the soft first quarter growth (advance Q1 GDP +0.7%) as “transitory” and remain optimistic on recovery.

Although there has been no hint regarding the timing of the next move, all elements point at a Fed action sooner rather than later.

The probability of June interest rate hike is now priced in at 93.80% by the US sovereign markets.

As the Fed reiterated its commitment to the gradual higher interest rates, investors continue expecting two to three additional rate hikes in 2017.

Higher interest rates mean higher US yields. Higher US yields translate into a higher opportunity cost for holding non-interest bearing assets, such as gold.

Fundamentals and technicals are aligned for a further decline

Stronger negative momentum, combined to judicious fundamental motives, suggest an extension of losses in the continuation of the post-Fed bearish reversal.

The next natural target for the short gold positions is the $1’220/1’218 (100-day moving average / minor 76.4% retrace) before the $1’200 mark.

Top sellers are presumed at $1’242 (minor 23.6% retracement on April – May decline) and $1’252 (major 38.2% retrace).

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