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Gold poised for break from tight consolidation

With the euro surging sharply on Tuesday, the US dollar took a steep dive despite a higher-than-expected US inflation reading from Tuesday’s Producer Price Index. The PPI for October came out at 0.4% against prior forecasts of 0.1%. The dollar has been pressured since late last week as concerns over US growth as well as the likelihood and timing of US tax reform have weighed on both equity markets and the dollar.

Meanwhile, gold has continued to trade in a tightening consolidation as relative dollar weakness and equity market jitters have provided a boost for the precious metal while the opposing force of higher interest rate anticipation has weighed on the demand for gold. The result of this push and pull has been a narrow trading range sandwiched between two key moving averages – the 50-day and 200-day.

Wednesday should provide more clarity on the US inflation picture, as the Consumer Price Index will be released. The consensus forecast for consumer prices in October is around 0.1%. It is highly possible, however, that the CPI will beat estimates much like the PPI did on Tuesday.

From a technical perspective, gold’s recent range contraction appears poised to see some type of a breakout. The direction of this breakout will be driven in large part by the US dollar, the Fed’s evolving policy stance, and equity market volatility. Currently, with the sharp dollar plunge on Tuesday, gold could be biased towards an upside breakout if there is any continuation of this dollar weakness. As noted, the current trading range is bounded by the 50-day moving average to the upside and the 200-day moving average to the downside. With any upside breakout, the next major hurdle resides around the key $1300 resistance level. To the downside, any breakdown should meet major support around $1250.

More From James Chen, CMT

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