XAU/USD – Gold Climbs to 27-Month High as Brexit Weighs on Markets

Gold has posted small gains on Wednesday, continuing the upward movement we have seen throughout the week. Gold is trading at a spot price of $1365 per ounce in the North American session. On the release front, ISM Non-Manufacturing PMI was unexpectedly strong, climbing to 56.5 points. This marked the strongest gain in eight months. The US trade deficit widened in May, buoyed by rising oil prices. All eyes are on the Federal Reserve, which will release the minutes of its June policy meeting later in the day. On Thursday, employment data will be in focus, with the release of ADP Nonfarm Employment Change and Unemployment Claims.

Gold prices continue to point upwards, as the safe-haven asset has become a magnet for jittery investors. The metal touched a high of $1375 earlier in the day, marking its highest level since March 2014. Gold has been one of the big winners of the Brexit referendum, as the financial markets bet on a Remain win and were completely caught off guard by the Brexit vote to leave the European Union. Gold has taken full advantage of the ensuing chaos, posting sharp gains of 8.8 percent in June and another 3.3 percent so far in July. The instability and uncertainty surrounding Brexit means that gold prices could continue to climb, and well-respected UBS has stated that gold has started a bull run and will hit the $1400 level in the short term.

The Brexit vote in late June continues to preoccupy the markets, and the Federal Reserve and US monetary policy have understandably taken a back seat. The Fed will be back on center stage later on Wednesday, as the Fed releases the minutes of its June policy meeting, which was held just one week before the Brexit vote. Fed Chair Janet Yellen and her colleagues have sounded cautious about the US economy, and the financial instability caused by Brexit could delay any rate hikes until 2017. The US economy is in good shape, but the Fed hasn’t raised rates since last December and is unlikely to seriously consider any rate hikes unless employment and inflation numbers point upwards. Although Yellen recently said that Brexit would have an impact on the US, San Francisco Federal Reserve President John Williams seemed to disagree with that assessment. On Tuesday, Williams said that the US markets had reacted to Brexit as expected, and the impact on the US economy would be much smaller than the euro crisis of 2011-2012. Is Brexit having an impact on the Fed’s monetary stance? We may get an answer to that question when the Fed meets again for a policy meeting on July 27.

The British electorate may have voted “Out” of the EU, but Brexit has led to political upheaval and economic instability in the UK and in Europe. There is no timetable as to when the exit from the European Union will take place or what type of trade agreement will define the new economic relationship between the EU and Britain. British leaders are in no rush to leave, but European leaders have called on Britain to exit as soon as possible in order to minimize the uncertainty and instability caused by the Brexit vote. When it comes to the EU, Britain finds itself in limbo (“neither in nor out”), and the lack of clarity regarding Britain’s exit from the EU will likely translate into continuing volatility in the currency markets and commodity markets.

XAU/USD Fundamentals

Wednesday (July 6)

• 8:30 US Trade Balance. Estimate -40.0B. Actual -41.1B
• 9:00 US FOMC Member Daniel Tarullo Speaks
• 9:45 US Final Services PMI. Estimate 51.5. Actual 51.4
• 10:00 US ISM Non-Manufacturing PMI. Estimate 53.3. Actual 56.5
• 14:00 US FOMC Meeting Minutes

Updated Key Events

Thursday (July 7)

• 8:15 US ADP Nonfarm Employment Change. Estimate 158K
• 8:30 US Unemployment Claims. Estimate 269K

*Key releases are highlighted in bold

*All release times are EDT

XAU/USD for Wednesday, July 6, 2016

XAU/USD July 6 at 13:10 EDT

Open: 1362.56 Low: 1361.20 High: 1375.17 Close: 1365.35

XAU/USD Technical

• XAU/USD posted small gains in the Asian and European sessions. The pair is steady in North American trade
• 1361 is a weak support line
• There is resistance at 1388
• Current range: 1361 to 1388

Further levels in both directions:

• Below: 1361, 1331, 1307, 1279 and 1255
• Above: 1388, 1416 and 1433

OANDA’s Open Positions Ratio

XAU/USD ratio is showing little movement, consistent with the lack of movement from XAU/USD. Currently, long positions have a majority (59%), indicative of trader bias towards XAU/USD continuing to move to higher levels.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.