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Gold extends recovery as dollar heads lower ahead of FOMC

The price of gold is up for the third consecutive day, making back more of the losses it suffered on Friday when the publication of the stronger-than-expected US employment report gave the US dollar a short-term boost.  But despite a slightly stronger US consumer inflation report today, the dollar has reacted negatively ahead of the FOMC rate decision later on. Headline CPI came in slightly ahead of expectations at 2.1% year-over-year while core CPI was in line at 2.3%. However, the dollar failed to respond positively, allowing the likes of the AUD/USD, GBP/USD and gold to extend their recoveries.

Investors are looking forward to the FOMC meeting later, where the Fed is widely expected to hold interest rates unchanged. In fact, according to the CME’s FedWatch tool, the Fed is not expected to trim interest rates again until at least July 2020, when the probability of a 25-basis point cut is currently around 50%. The probability of a cut increases as we head towards the latter parts of the year.

So, the dollar, and by extension gold, may not respond much in reaction to the Fed’s likely inaction today. But the markets could still move sharply should Chairman Jay Powell says something surprising at the press conference or the dot plots reveal an unexpected shift in interest rate projections. With the US economy holding its own relatively better than the rest of the world, we doubt the Fed will be too dovish, however. At the same time, though, there is a risk the US-China trade situation may go from bad to worse in 2020. This is the key risk facing investors and the Fed.

Speaking of the US-China situation, Trump must decide whether to add tariffs to $160 billion of Chinese goods over the weekend. Whilst there have been mixed reports over a potential delay, advisors are to meet with Trump over the coming days to hopefully finalise the decision. However, in the event the tariffs are not cancelled by Friday, then we may see a rise in risk aversion ahead of the weekend.

So, safe-haven gold could extend its gains further while uncertainty remains over Sunday’s tariffs, regardless of what the FOMC decides today.

Source: Trading View and City Index

From a technical point of view, gold remains range-bound for now. Key support at $1450 is holding, although prices haven’t accelerated away from here yet. Resistance is seen around $1472/3 then around $1480. A break above $1480 could pave the way for gold to rise above its bearish trend line. It needs to break above the trend line to potentially resume its long-term bullish trend.

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