Gold Down Sharply as Fed Hints at June Hike

Gold prices continue to drop on Thursday, as the metal trades at a spot price of $1251.63 an ounce in the North American session. On the release front, the Philly Fed Manufacturing Index dropped 1.8 points, disappointing the markets. Unemployment Claims dropped sharply to 278 thousand, within expectations. The markets will be listening closely to speeches from two Federal Reserve presidents, Stanley Fischer and William Dudley.

Gold is down 2.1% since the release of the Federal Reserve minutes on Wednesday. The minutes were surprisingly hawkish, as policymakers left the door wide open for a rate hike in June. Just one week ago, Fed fund futures were indicating a 4% chance of a rate hike in June, but this has jumped to 34% on Thursday. A rate hike is bearish for gold prices, since higher rates make the US dollar a more attractive than assets such as gold, which don’t provide any interest.

The highly-anticipated Federal Reserve minutes were released on Wednesday. The minutes indicated that a June rate hike remains firmly on the table, and the currency markets have reacted with strong volatility. According to the minutes, the Fed wants to see stronger growth in the second quarter as well as better numbers from the inflation and employment fronts. If this is achieved, the Fed said it “likely would be appropriate” to raise rates at the June meeting. This message is somewhat hawkish in comparison to recent statements by Fed chair Janet Yellen, which were more cautious about the strength of the US economy. The markets were skeptical that June would be a “live meeting”, with most analysts assuming that the Fed would continue to sit on the sidelines. The minutes have however, drastically changed market sentiment, since it’s clear that the June meeting will be a crucial one, as it could mark the Fed’s first interest rate hike this year. With the Fed saying that a key factor in a rate hike decision will be the strength of the US economy, upcoming major economic indicators will be under the market microscope, particularly inflation and employment numbers.

XAU/USD Fundamentals

Thursday (May 19)

• 8:30 US Philly Fed Manufacturing Index. Estimate 3.2. Actual -1.8
• 8:30 US Unemployment Claims. Estimate 276K. Actual 278K
• 9:15 US FOMC Member Stanley Fischer Speaks
• 10:00 US CB Leading Index. Estimate 0.4%. Actual 0.6%
• 10:30 US Natural Gas Storage. Estimate 75B. Actual 73B
• 10:30 US FOMC Member William Dudley Speaks

Upcoming Key Events

Friday (May 20)

• 10:00 US Existing Home Sales. Estimate 5.40M

*Key releases are highlighted in bold

*All release times are EDT

XAU/USD for Thursday, May 19, 2016

XAU/USD May 19 at 13:00 EDT

Open: 1260.50 Low: 1243.81 High: 1261.37 Close: 1251.63

XAU/USD Technical

• XAU/USD posted small losses in the Asian session. The pair lost ground in the European session but has recovered in North American trade
• 1232 is a providing support
• 1255 remains fluid and has switched to a resistance role. It could see further activity in the North American session
• Current range: 1232 to 1255

Further levels in both directions:

• Below: 1232, 1207 and 1191
• Above: 1255, 1279, 1303, 1324

OANDA’s Open Positions Ratio

XAU/USD ratio is almost unchanged on Thursday. Long positions have a strong majority (62%), indicative of trader bias towards XAU/USD reversing directions and moving 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.