Gold Improves, US Manufacturing Report Disappoints

Gold prices are slightly higher on Tuesday, following sharp losses a day earlier. In the North American session, the base metal is trading at $1212.69 an ounce in the North American session. In economic news, another US manufacturing report pointed to contraction in the manufacturing sector. US Empire State Manufacturing Index posted a weak reading of -16.6 points, well off expectations. We’ll get a look at some key US data on Wednesday, with the release of Building Permits and PPI. As well, the Federal Reserve will publish the minutes of its January policy meeting.

Last week was excellent for gold, as the base metal surged 5.6 percent. Gold climbed as high as $1260 late last week, its highest level since last February. It’s been a superb start to the year for gold, as market turmoil as spooked investors, who have responded by fleeing risk and snapping up safe-haven assets like gold. Weak oil prices and the China slowdown have led to financial turmoil and stock markets around the world have registered sharp drops. Developed economies have been hit hard, hampered by low inflation and weak global demand for their products. This economic turbulence which has characterized the early part of 2016 is been a boon for gold, and with these economic conditions likely to continue for some time, gold prices could continue to climb.

Is the Federal Reserve considering negative interest rates? Such a concept bordered on the unthinkable just a few months ago, when the US economy was firing on all four cylinders and the Fed raised interest rates for the first time in nine years. Fast forward to Yellen’s appearance before Congress last week, where the Fed chair refused to rule out negative interest rates. The Fed has rejected making such a move in the past, and this is unlikely to change. Still, Negative Interest Rate Policies (NIRP) has become a relevant tool for central banks. The Bank of Japan shocked the markets in January when it adopted negative rates, and the ECB has had this policy in place for some time on deposits, and has hinted that it could adopt this scheme to its benchmark rate, which is currently at 0.05%. Such a scheme is supposed to combat deflation and boost economic growth by pressuring banks to increase lending. In her testimony, Yellen noted that inflation rates in the US have remained very low due to the strong dollar and weak oil prices. Given the current economic situation, many experts expect no more than two rate hikes this year, perhaps in June and December. At the same time, any improvement in key US numbers will heat up speculation about a possible March hike. If the markets smell a March rate hike, we could see the US dollar posts broad gains.

XAU/USD Fundamentals

Tuesday (Feb. 16)

• 8:30 US Empire State Manufacturing Index. Estimate -10.5 points. Actual -16.6 points
• 10:00 US NAHB Housing Market Index. Estimate 60 points. Actual 58 points
• 16:00 US TIC Long-Term Purchases
• 19:30 US FOMC Member Eric Rosengren Speaks

Upcoming Key Events

Wednesday (Feb. 17)

• 8:30 US Building Permits. Estimate 1.21M
• 8:30 US PPI. Estimate -0.2%
• 14:00 FOMC Meeting Minutes

*Key releases are highlighted in bold

*All release times are EST

*Key events are in bold

XAU/USD for Tuesday, February 16, 2016

XAU/USD February 16 at 11:55 EST

Open: 1207.97 Low: 1191.00 High: 1217.09 Close: 1213.64

XAU/USD Technical

• XAU/USD posted losses in the Asian session but recovered in European trade. The pair is steady in the North American session.
• 1205 is a weak support line
• There is resistance at 1232
• Current range: 1205 to 1232

Further levels in both directions:

• Below: 1205, 1191, 1175 and 1151
• Above: 1232, 1255 and 1279

OANDA’s Open Positions Ratio

XAU/USD ratio has shown slight movement towards long positions, which command a strong majority (61%). This is indicative of trader bias towards the pair continuing its current upward movement.

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.