3 Numbers: Is Gold Poised For An Upside Breakout?
James Picerno | Jun 12, 2017 06:30AM ET
- Gold’s recent rally has spawned bullish forecasts for the precious metal
- The 2-year Treasury yield is predicting a rate hike at Wednesday’s Fed meeting
- Will repercussions from last week's UK election continue to weigh on GBP/USD?
The week begins with a light schedule for economic releases. Let’s fill the vacuum by focusing on three markets that will be under close scrutiny this week.
The recent rally in gold has inspired some analysts to roll out bullish forecasts for the metal. The policy sensitive two-year Treasury yield will be under close scrutiny ahead of Wednesday’s Fed announcement. Meanwhile, forex traders will be monitoring GBP/USD this week as pressure rises on UK Prime Minister Theresa May to resign.
Gold: The market’s been driving gold prices higher this year, marking a reversal from the sharp downturn in late 2016.
Although it’s premature to conclude that the precious metal is in a sustainable uptrend, gold's technical profile is looking firmer these days. The 50-day moving average earlier this year rose above the 100-day average for the first time since last October, based on daily prices via the London Bullion Market Association.
Jesse Felder, a former hedge manager who pens the Felder Report, advised last week that the “stars are starting to align for gold bulls.” He cites recent price action that lifted gold above its six-year downtrend line and an estimate that suggests gold is cheap relative to financial assets. He predicts that gold is on track to outperform stocks in the years ahead. “From a macro perspective, there has probably not been a better time to be a buyer of gold in our lifetimes.”
Maybe, although traders (and long-term investors) this week will be watching to see if gold can break above last week’s intraday high of just below $1,299 an ounce. If the bulls prevail in the days ahead, Felder’s thesis will resonate a bit deeper.
US: Two-Year Treasury Yield: The benchmark 10-year Treasury rate rebounded late last week after falling to a seven month low on Tuesday. A key source of support for the jump in the yield: widespread expectations that the US Federal Reserve will announce a rate hike on Wednesday.
Fed funds futures are estimating the probability of tighter policy at 99.6%, according to CME data on June 10. Before last Tuesday, however, the 10-year yield was pricing in a different scenario, or so it appeared.
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But the policy sensitive two-year rate is on board with the crowd’s outlook. At last week’s close, the two-year yield ticked up to 1.35%, a one-month high that’s near its post-recession peak, based on daily data via Treasury.gov.
Some analysts question the wisdom of raising rates in the wake of weaker-than-expected inflation for the year-over-year change through April which trimmed the price trend below the Fed’s 2% target. But with no smoking guns in the macro data overall, the Fed is widely assumed to remain on track to lift rates on Wednesday.
If the crowd has a change of heart in embracing that forecast, the two-year rate will slide ahead of Wednesday’s FOMC meeting. But between now and then, the schedule for economic releases is thin. Short of a bolt from the blue, the market’s assuming that a rate hike is fate.
GBP/USD: Another election, another round of upheaval and confusion. The first victim: the pound.
Before Thursday’s surprising setback for Prime Minister Theresa May, who called early elections on the assumption that the outcome would strengthen her hand, the pound was rebounding vs. the US dollar. But in the wake of losing its majority in parliament last week, the government finds itself in a precarious position, which creates a new level of political uncertainty for negotiating the country’s exit from the European Union . The initial reaction in the currency markets: dump sterling.
Although May insisted on Friday that she will stay on as prime minister, there are growing calls that she step down. Her diminished Conservative Party still holds the most seats in parliament, but no longer holds an outright majority. As a fix, a coalition was being negotiated with Northern Ireland’s Democratic Unionist Party, which provides a fragile majority to move forward.
What does that mean? No one’s quite sure at the moment, which was enough of an excuse to sell the pound in the wake of May’s humiliating defeat. The loss comes just two weeks ahead of the formal start of Brexit negotiations.
Some members of parliament are calling on May to step down ahead of that date and Brexit negotiations should be put on hold. “It is simply inconceivable that the prime minister can begin the Brexit negotiations in just two weeks' time,” said Tim Farron, the leader of the Liberal Democratic Party.
It’s safe to say that any rebound for GBP/USD is on hold until further notice too, at least until the political chaos is sorted out. Meantime, the crowd is wondering if the post-election slide in the currency vs. the greenback will resume this week. For now, much depends on how the headlines shake out. If May resigns, would that lift the pound?
Perhaps, although the bigger question is what’s in store for Brexit. No one has a clue at this point, which suggests that GBP/USD will tread water until a degree of clarity emerges on what comes next.
Disclosure: Originally published at Saxo Bank TradingFloor.com
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