XAU/USD – Gold Stems Losses as Markets Fret Over Brexit, BoE Rate Decision

Gold has reversed directions and moved higher on Wednesday, following strong losses over the past two sessions. The metal is trading at $1343.58 in North American trade. On the release front, Crude Oil Inventories came in at -2.5 million, weaker than the estimate of  -2.3 million. US Import Prices posted a weak gain of 0.2%, well below expectations. On Thursday, the US will release two key indicators – PPI and Unemployment Claims.

Gold is higher on Wednesday, climbing above the $1340 level. British Prime Minister David Cameron stepped down earlier in the day and was replaced by Theresa May. Although this has brought some much-needed political stability in Britain, the change in leadership occurred much more quickly than expected, which means that the tough and messy negotiations over the Brexit divorce will commence sooner than expected.  Home Secretary Theresa May has taken over as Prime Minister. May was a strong supporter of the Remain camp, but she will now be mandated with presiding over Britain’s exit from the European Union. May has stated that the government fully intends to honor the referendum vote, stating “Brexit means Brexit”.  The British electorate may have voted “Leave”, but the vote may prove to be the easy part of the process. An EU member has never invoked the exit clause before, and there is no timetable as to when the exit will occur or what kind of trade agreement will define the new economic relationship between the EU and Britain. As well, the Bank of England is poised to cut interest rates for the first time since 2009, and such a move could have a strong impact on the markets. The BoE is expected to cut rates in order to head off an economic downturn in Britain due to Brexit. At the same time, BoE head Mark Carney, who appeared before a parliamentary committee on Tuesday, acknowledged that Brexit could lead to downturn in the economy, and that the steps the central bank was taking in response would not provide a “magic bullet” against Brexit.

Back in December of last year, when the Federal Reserve raised interest rates for the first time in nine years, there were high hopes that the Fed would continue with a series of hikes in 2016. Fast forward to July, and the Fed is yet to make a move this year, as the US economy has not matched its impressive growth rates in 2015. Last week’s Fed minutes reinforced the perception that the Fed is unlikely to tighten policy anytime soon, as the tentative Fed remains cautious about the strength of the US economy. Although some Fed members have said that rates could be raised up to two times in 2016, clearly the markets aren’t buying it. Given the current economic climate, the markets are pessimistic about any rates moves before 2017. Investors have priced in no chance of a rate increase at the next Fed meeting on July 26-27, and just an eight percent chance of a hike in 2016. Still, market sentiment can change very quickly, so if US employment and inflation numbers improve in the second half of the year, the likelihood of a rate hike this year will increase.

XAU/USD Fundamentals

Wednesday (July 13)

• 8:30 US Import Prices. Estimate 0.6%. Actual 0.2%
• 10:30 US Crude Oil Inventories. Estimate -2.3M. Actual -2.5M
• 13:01 US 30-year Bond Auction
• 14:00 US Beige Book
• 14:00 US Federal Budget Balance. Estimate 24.2B

Thursday (July 14)

• 8:30 US PPI. Estimate 0.3%
• 8:30 US Unemployment Claims. Estimate 263K

*Key releases are highlighted in bold

*All release times are EDT

XAU/USD for Wednesday, July 13, 2016

XAU/USD July 13 at 12:30 EDT

Open: 1333.373 High: 1345.38 Low: 1327.54 Close: 1343.58

XAU/USD Technical

• XAU/USD posted small gains in the Asian and European sessions. The pair has shown limited movement in North American trade
• 1361 is a strong resistance line
• 1331 is providing support
• Current range: 1331 to 1361

Further levels in both directions:

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

OANDA’s Open Positions Ratio

XAU/USD ratio is showing little movement on Wednesday. Long positions command a majority (59%), indicative of trader bias towards XAU/USD continuing to gain ground.

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.