Gold Holds Bearish Bias In Short And Medium Term, Downside Risk Remains High

Gold holds a bearish bias both in short and medium-term time frames. The market is continuing its downward trajectory from the September 8 high of 1357.47 with little indication of stopping. Trend indicators and momentum oscillators are suggesting that risk remains to the downside.

Studies on the 4-hour chart show a bearish crossover of the 20 and 50-period moving averages that took place on September 13. The negative alignment and sharp slope down of both moving averages point to deeper declines. The next target to the downside is at 1262.25 ahead of the August 8 low of 1251.49. From this point, downside momentum would strengthen and open the way towards the July 7 low of 1204.79.

The RSI indicator on the 4-hour chart is approaching oversold levels at 30 which could suggest that downward pressure may ease for now. Should gold prices bounce higher and rise above 1280, then 1300 would come into view. Any further rise from this pivotal level would shift focus to the upside towards 1315 and then from here, 1342 is expected to be an important barrier. Only a move above the 1354.47 peak would help increase upside momentum to bring about a resumption of the uptrend that started from 1204.79.

The short-term trend is expected to remain bearish as long as the market is capped by the 20-period MA and unless gold prices can reclaim the 1300 handle soon.

USD and treasury yields better bid amid speculation about hawkish shift at the head of the Fed

The US dollar bounced back on Monday, extending gains against almost all of its peers. The uncertainty generated by the Catalan situation has also forced traders to pull out of the single currency. Over the last few months, the euro had won the favour of investors at the expense of the greenback, amid rising uncertainty in the US political outlook as well as lacklustre economic data. Now that Republicans seemed that have found a common about the much awaited tax reform, investors are more optimistic about the inflation and growth outlook in the world’s largest economy.

Last Friday, the release of disappointing PCE readings had only little effect on the investors’ optimism as both US treasury yields and the greenback quickly bounced back. The US 10-year sovereign rate rose to the highest level since July 11th, hitting 2.364%, while the dollar index returned to 93.60 after falling to 92.95 last week. One must be said that the speculations surrounding a potential shift at the head of the Federal Reserve, with the possible removal of Janet Yellen for a more hawkish candidate such as Kevin Warsh, has fuelled the yield rally.

We maintain our bullish on the US dollar as we believe the market hasn’t fully priced the upcoming rate hike together with the balance sheet reduction program, yet. However, we would stay cautious regarding further EUR weakness against the USD as another push, which can the take the form of a worsening of the Catalan situation, is needed.

Spanish vote triggers slight euro weakness

The Catalan referendum has brought a very important question in centre stage. Do people have in Europe the self-determination right? It seems that the answer is a big no. Spanish Prime minister declared that there was not vote (i.e. legal) vote in Catalonia. Anyway the police violence have been used and it definitely drove “No” voters to stay at home. As a result this has created this surprising result: 90% of Catalonians are in favour of the independence vote.

This is then weakening the Spanish central power and European nations are being weekend by regionalists. Amid the vote, the single currency has slightly declined but remained above 1.17 USD. We believe the impact of this vote won’t weaken the European Union. We rather consider that a weaker Spain would benefit to the European Union. European Union does not need nations.

According to us, the Catalonian vote won’t trigger a political crisis in Europe, even in the short-term. However this vote reveals the economic underlying difficulties of Spain. Catalonia is the richest region in Spain and is not accepting to “pay for everyone”.

The EUR/USD has been retreating from Friday's highs due to yesterday's events in Catalonia. Spanish IBEX opened lower while other European equities were mixed. The EUR/USD is trying to reach 1.1725-1.1690 zone where it could decide about the next direction. A bounce from the zone could target 1.1740 followed by 1.1828. Only a 4h or daily close above 1.1828 might return the pair into the positive progressive channel. If the pair drops below 1.1690, it could be trapped in the bearish AP (Andrew's Pitchfork) and we might see the return of the bearish trend towards 1.1592.

W H3 - Weekly Camarilla Pivot (Weekly Interim Resistance)

W H4 - Weekly Camarilla Pivot (Strong Weekly Resistance)

D H4 - Daily Camarilla Pivot (Very Strong Daily Resistance)

D L3 – Daily Camarilla Pivot (Daily Support)

D L4 – Daily H4 Camarilla (Very Strong Daily Support)

POC - Point Of Confluence (The zone where we expect price to react aka entry zone)

Due to release of another set of the US inflation and consumer spending data, which did not change the overall prospect about the upcoming interest rate hike, the buck managed to drag the bullion through the 61.8% Fibo level at 1,278.96, thus confirming an existence of a new descending channel. Although this breakthrough happened a little bit earlier than expected, but it still perfectly fit into the general picture, in which the rate was expected to gradually move to the bottom, trying to reach the lower edge of a dominant ascending channel. Nevertheless, during this trading session the pair is likely to make a temporary rebound near the 1,273.14 level, which represents location of the 100-day SMA. If such scenario materializes, the junior channel might transform into a falling wedge.

Despite a certain volatility that was caused by a release of information on the US consumer spending, the pair continued to gradually climb to the top, as expected. In the first half of Monday, the rate is likely to cross the upper trend-line of a junior descending channel and continue to head towards the updated weekly R1 at 113.36. Such scenario is supported by the 55-, 100- and 200-hour SMAs as well as the weekly PP, which are all located below the current market price.

The only event that has a chance to push the currency pair in the opposite direction is a release of US ISM Manufacturing PMI at 14:00 GMT. Otherwise, the pair is projected to head to the north, fluctuating in a senior ascending channel.

In accordance with expectations, a combination of the 55- and 100-hour SMAs as well as the former monthly R2 did not let the pair to make any notable advances on Friday. In fact, they continued to push it to the bottom, simultaneously forcing to form a minor symmetrical triangle. Due to release of a whole bunch of various fundamental data during this week, it is difficult to project how the pair is going to move. The only thing that can be said for sure is that the northern path is secured by numerous technical indicators, such as the 200-hour SMA and the 50% Fibonacci retracement level at 1.3503. In addition to that, the pair has recently made a rebound from the upper boundary of a long-term descending channel. Hence, the gradual slip to the bottom remains a more plausible scenario.

In line with expectations, the currency exchange rate managed to break to the top, crossing the 100-hour SMA plus another resistance level near 1.1810. During the two-day surge the pair even formed a little ascending channel. But due to referendum on independence in Catalonia the Euro lost 0.3% against the Dollar and fell out of the channel. The fact that now the pair is located below a combination of the 55- and 100-hour SMAs, suggests that might continue to the move to the bottom. The downfall might be additionally spurred by the official comments from the EU, Catalan and Spanish governments through the day. However, this event is unlikely to change the general scenario, according to which the rate is expected to continue to climb to the top after bouncing off from the 100% Fibo at 1.1715.

The Canadian Dollar weakened against the Greenback in the wake of softer monthly economic reports on Friday. The USD/CAD rose by 24 base points or 0.20% to keep growing up to the highest level in four weeks of 1.2511, but continued the session below the 1.2500 mark.

The reports showed that the Canadian Gross Domestic Product was flat in the month of July. However, the country's economy marked the strong growth for eight months in succession, which prompted the Bank of Canada to hike key interest rates two times during the last three months. However, the Bank's Governor Stephen Poloz dovish comments provided and moderation in the economic growth momentum raise concerns over another rate hike in 2017.

The British Pound fell significantly against the US Dollar on Friday morning, following the couple of the UK economic reports. The Sterling decreased against its American counterpart by 47 base points or 0.35% to the 1.3373 mark to fully deprive Thursday's gains.

Official projections for Britain's current account deficit showed that the gap between the entire UK income and spending widened significantly, which now is expected to reach 5.9% of GDP in the June quarter. Other figures revealed that that the UK economy expananded just 1.5% year-over-year in the Q2, the slowest growth pace since 2013. Weak service sector and growth figures sent the Pound down, appearing to cast doubts whether the BoE would raise key interest rates this year.

On the GBPUSD we see strong rising price action since August of 23. We see a potential impulse in the making, that can extend its gains towards the 1.3722 region in coming days or weeks. However, current slow and choppy price activity can be corrective wave 4 in the making, that can search for its support near the Fibonacci ratio of 38.2 and near the former swing high of wave three and there make a new bounce higher.

GBPUSD, 4H