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Gold Prices Maintain Sideways Range Despite Plunge in Gold Volatility

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Gold Price Talking Points:

  • Fed interest rate cut odds, as measured by Eurodollar contract spreads, are at their lowest level since May 30.
  • Gold volatility, as measured by the Cboe’s ETF, GVZ (which tracks the 1-month implied volatility of gold as derived from the GLD ETF option chain) is at its lowest level since June 19.
  • Retail trader positioningcontinues to warn of a potential pullback in gold prices.

Looking for longer-term forecasts on Gold and Silver prices? Check out the DailyFX Trading Guides.

The big rally in gold prices seen in June has yet to find traction anew in July. In fact, since the week of the June Fed meeting, gold prices haven’t gone anywhere: trading in a 4% range since the market close on June 21, gold prices are only down by -0.42% over the past two-plus weeks (11 days and counting) of trading. The lack of continuation in the gold price rally coincides with a pullback in Federal Reserve interest rate cut expectations in recent days.

Fed Rate Cut Expectations Shrink, Take Shine Off of Gold Prices

For the past two months, movements in Fed rate cut odds have been the principal driver of price action across asset classes. Since the June US jobs report’s better than expected result, traders have been reducing their expectations of aggressive dovish action by the FOMC over the coming months.

Read more: US Recession Watch – What the US Yield Curve is Telling Traders

Prior to the June US jobs report, there was a 100% chance of a 25-bps interest rate cut in July and a 23% chance of a 50-bps in July, according to Fed funds futures contracts; after the June US jobs report, there is still a 100% chance of 25-bps cut, but now only a 1% chance of a 50-bps cuts in July. The base case scenario is now for two rate cuts in 2019.

Eurodollar contract spreads are showing similar movement. The June 2019/December 2019 Eurodollar contract spread is now discounting -63-bps, a dramatic shift from the -88-bps priced-in two weeks ago. In other words, Eurodollar contracts are also discounting two rate cuts in 2019 instead of three.

Gold Volatility Plummets Alongside Receding Fed Rate Cut Odds

If volatility is a measure of uncertainty, gold volatility’s expansion in June can be traced back to the uncertainty created by the US-China trade war and the resulting impact on Fed interest rates; the same can be said for the recent contraction in gold volatility. While other asset classes don’t like increased volatility (signaling greater uncertainty around cash flows, dividends, coupon payments, etc.), precious metals tend to benefit from periods of higher volatility as uncertainty increases the appeal of gold’s and silver’s safe haven appeal.

GVZ (Gold Volatility) Technical Analysis: Daily Price Chart (October 2016 to July 2019) (Chart 1)

gold volatility, gold volatility technical analysis, gold volatility chart, gold volatility forecast, gold price volatility

The ongoing slide in market-based expectations for aggressive dovish action by the Fed is weighing on gold volatility. Gold volatility (as measured by the Cboe’s gold volatility ETF, GVZ, which tracks the 1-month implied volatility of gold as derived from the GLD option chain) is down to 12.78, its lowest level since June 19.

Gold Prices are Stronger than the Gold Volatility Drop Suggests

During the gold volatility expansion from the all-time closing low in GVZ on May 29, 2019 at 8.86 to the 2019 high on June 25, 2019 at 17.08 (92.8% gain by GVZ), gold prices rallied by 11.2%. However, during the recent pullback in gold volatility, gold prices have not fallen as much as the recent relationship would imply: the last time that GVZ was at 12.78, gold prices were near 1350.

It would follow that gold prices are still proving resilient during the recent correction, a sign that recent price action has been corrective rather than the end of the longer-term bottoming effort and inverse head and shoulders.

Gold Price Technical Analysis: Daily Chart (July 2018 to July 2019) (Chart 2)

gold price, gold technical analysis, gold chart, gold price forecast, gold price chart

In our gold price technical analysis update at the end of last week, it was noted that “while the long-term forecast for gold prices remains bullish as long as the inverted head and shoulders pattern neckline is intact, traders may still want to be patient here as the odds of more weakness if not sideways price action have increased.” Since then, gold prices have maintained their sideways range between 1381.62 and 1439.14, the post-June Fed meeting swing high and low. A consolidation after an uptrend is typically the sign of a continuation effort; the sideways consolidation has a bullish bias.

To this end, unless gold prices lose 1381.62 as well as the daily 21-EMA, a moving average that hasn’t been closed below since the bullish outside engulfing bar/key reversal on May 30, then there is still good reason to believe that the long-term bullish forecast remains valid. Even so, the inverse head and shoulders pattern neckline doesn’t come back into play until 1350 at the end of July; a loss of 1381.62 would likely signal a deeper pullback into the end of the month.

IG Client Sentiment Index: Spot Gold Price Forecast (July 9, 2019) (Chart 3)

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Spot gold: Retail trader data shows 67.3% of traders are net-long with the ratio of traders long to short at 2.06 to 1. The number of traders net-long is 2.5% higher than yesterday and 11.1% higher from last week, while the number of traders net-short is 0.6% lower than yesterday and 6.2% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests spot gold prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger spot gold-bearish contrarian trading bias.

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Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides



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Forex

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

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Canadian Dollar Talking Points

USD/CAD holds near the monthly low (1.3468) as the Bank of Canada (BoC) keeps the benchmark interest rate at the “effective lower bound of ¼ percent” in June, but the update to Canada’s Employment report may influence the exchange rate as the economy is expected to shed 500K jobs in May.

USD/CAD Continues to Eye March Price Gap Ahead of Canada Employment

USD/CAD extends the series of lower highs and lows from the start of the month as the BoC announces that the “Bank is reducing the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly operations.”

Image of BoC interest rate

The decision suggests the BoC led by Tiff Macklem will scale back the dovish forward guidance as the central bank emphasizes that “any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target.

Image of DailyFX economic calendar for Canada

It remains to be seen if the update to Canada’s Employment report will influence the monetary policy outlook as the economy is expected to shed 500K jobs in May, while the jobless rate is projected to hit 15%, which would mark the highest reading since the data series began in 1976.

The ongoing deterioration in the labor market may put pressure on the BoC to further support the economy as “the level of real GDP in the second quarter will likely show a further decline of 10-20 percent,” but Governor Macklem and Co. may carry out a wait-and-see approach over the coming months as “the Bank expects the economy to resume growth in the third quarter.

In turn, the BoC may continue to rule out a negative interest rate policy as “the Bank’s programs to improve market function are having their intended effect,” and the central bank may alter the forward guidance at the next meeting on July 15 as the “decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown.”

With that said, the Canadian Dollar may continue to outperform its US counterpart as the Federal Reserveprepares to have the Municipal Liquidity Facility along with the Main Street Lending Program up and running in June, and the pullback from the yearly high (1.4667) may continue to evolve as USD/CAD snaps the range bound price action from April.

The Relative Strength Index (RSI) highlights a similar dynamic as the indicator tracks the downward trend from May, but the bearish momentum may abate over the coming days as the oscillator struggles to push into oversold territory.

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USD/CAD Rate Daily Chart

Image of USD/CAD rate daily chart

Source: Trading View

  • Keep in mind, the near-term rally in USD/CAD emerged following the failed attempt to break/close belowthe Fibonacci overlap around 1.2950 (78.6% expansion) to 1.2980 (61.8% retracement), with the yearly opening range highlighting a similar dynamic as the exchange rate failed to test the 2019 low (1.2952) during the first full week of January.
  • The shift in USD/CAD behavior may persist in 2020 as the exchange rate breaks out of the range bound price action from the fourth quarter of 2019 and clears the October high (1.3383).
  • However, recent price action suggests the pullback from the yearly high (1.4667) will continue to evolve as USD/CAD takes out the April low (1.3850),and the exchange rate may continue to exhibit a bearish behavior in June as the Relative Strength Index (RSI) extends the downward trend from the previous month.
  • Will keep a close eye on the RSI as it flirts with oversold territory, but the bearish momentum may abate over the coming days if the oscillator fails to hold below 30.
  • Need a break/close below the Fibonacci overlap around 1.3440 (23.6% expansion) to 1.3460 (61.8% retracement) to fill the price gap from March, with the next area of interest coming in around 1.3290 (61.8% expansion) to 1.3320 (78.6% retracement).

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— Written by David Song, Currency Strategist

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What is Fueling the Rally?

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Dow Jones, Nasdaq 100, S&P 500 Price Outlook:

  • The S&P 500 reclaimed the psychologically significant 3,000 mark last week
  • Meanwhile, the Nasdaq 100 continues to edge closer to the all-time highs it saw in February
  • The Dow Jones remains a laggard but has posted gains of its own in recent weeks

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

The Dow Jones, Nasdaq and S&P 500 have continued to melt higher in recent days even as bullish catalysts seem to sputter out. Following the initial crash in February and early March, gains were quickly established in what many believed to be a “bear market rally” as governments and central banks offered aid in many shapes and sizes.

Nasdaq 100 Price Chart: 4 – Hour Time Frame (February – June)

Nasdaq 100 price chart

In the weeks that followed, market pundits attributed the continuation rally to slowing coronavirus cases and the efficacy of quarantine procedures. Now the three equity indices are approaching prior levels, but more than 40 million Americans are unemployed, bankruptcies have been declared, supply chains have been disrupted and other fundamental concerns have been ignited. Still, the Dow Jones, Nasdaq and S&P climb. So what exactly is fueling this recovery rally?

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Well, to be sure, not every market move has to have a single and easily identifiable catalyst. Similarly, markets can stay irrational for extended periods of time, so gains can be built even when the underlying fundamental landscape may suggest otherwise. This phenomenon could be seen, at least to some degree, in late January and early February when it was becoming more apparent the coronavirus would become a global ordeal.

S&P 500, Crude Oil and Copper Daily Price Chart (August 2019 – January 2020)

Dow Jones, Nasdaq 100, S&P 500 Forecasts: What is Fueling the Rally?

Chart created with TradingView. Taken from Twitter.

While other equity markets, risk-sensitive currencies and commodities like crude oil plummeted, the three US indices trudged higher still. At the time, I noted the relationship between crude oil and the S&P 500, highlighting the infrequency of such a divergence.

At present, the catalysts for a continuation rally beyond all-time highs seem few and far between. Further still, domestic unrest will likely dent coronavirus recovery efforts and US-China tensions have soared. When taken together, it seems unlikely the Dow Jones, Nasdaq and S&P 500 will reach new heights, but other risk sensitive assets like the Australian, Canadian and New Zealand Dollars have rallied, exhibiting widespread risk appetite.

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Thus, it can be argued US equity prices have become detached from their underlying fundamentals, but shorter-term trading involves price, not necessarily economic principles, and weeks of gains would suggest the current trend is higher still, however unfounded it may seem.

While I am of the opinion that some of these gains will have to be forfeited eventually, attempting to call the top at each leg higher is presumptuous. With that in mind, it may be prudent to wait on the sidelines until a catalyst can spark selling that is met with conviction if you possess a bearish bias, because it seems that none of the current threats have sparked such a move yet. In the meantime, follow @PeterHanksFX on Twitter for updates and keep close tabs on the price action in the days to come.

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–Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX



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Index Surges Through Price Gap, Can it Continue?

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FTSE 100 Price Outlook:

FTSE 100 Forecast: Index Surges Through Price Gap, Can it Continue?

The FTSE 100 surged to its highest level since early June on Wednesday after the equity index pierced a longstanding technical barrier around 6,200. The zone marked confluent Fibonacci levels and had worked to stall bullish attempts higher in the past, notably coinciding with the swing-high in late April. All in all, the ascending channel with which the FTSE 100 trades remains intact and passing through resistance allowed for bulls to capitalize on open air above.

FTSE 100 Price Chart: 4 – Hour Time Frame (March – June)

FTSE 100 price chart

With a price gap ranging from roughly 6,200 to 6,400, the bullish break above resistance at 6,200 opened the door to a quick continuation – due to the nature of price gaps – and the FTSE must now negotiate secondary resistance around 6,400. 6,400 aligns not only with the top of the gap, but also another Fibonacci level. With that said, the spot is likely to influence price, at least to some degree, in the days ahead.

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If sentiment shifts and risk appetite diminishes, the FTSE 100 may retreat from resistance at 6,400 and fall back into the 6,400 to 6,200 range. Since the gap was filled, price movement should be met with more resistance – regardless of direction. Either way, the FTSE 100 should now enjoy support from prior resistance at 6,200, and due to the level’s influence in the past, it may prove to be a vital staging ground for bullish attempts down the road.

FTSE 100
BEARISH

Data provided by



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily 7% -1% 3%
Weekly 14% -5% 3%

With the ascending channel intact and a series of higher-highs and higher-lows, FTSE 100 price action suggests further strength may be on the horizon. Coupled with IG Client Sentiment Data which reveals retail clients are net-short, it seems as though the shorter-term trend is leaning toward a continuation higher.

That being said, I have my reservations about current stock market activity and suspect the risk-reward relationship for many indices is currently skewed to the downside – a topic discussed at length in my webinar. Nevertheless, price is unemotional and unfeeling and recent price action is hardly a harbinger of bearish reversals so price may continue higher in the shorter-term regardless of the underlying fundamentals. In the meantime, follow @PeterHanksFX on Twitter for updates.

–Written by Peter Hanks, Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX



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