Gold: What does Brexit deal mean for the metal?
Fawad Razaqzada October 17, 2019 1:19 PM
News that the UK government and EU had secured a Brexit deal sent the pound and euro soaring higher, along with European stocks and US index futures.
I reckon not a lot.
News that the UK government and EU had secured a Brexit deal sent the pound and euro soaring higher, along with European stocks and US index futures. Safe haven gold fell back after rising on Wednesday, before bouncing back to turn flat on the day as stocks eased off their highs again.
The Brexit deal will be presented to European leaders at the EU Economic summit in Brussels today, before UK MPs vote on it on Saturday. Now the DUP has already announced it cannot support the new arrangement, while the opposition party’s leader Jeremy Corbyn has called it "an even worse deal than Theresa May’s, which was overwhelmingly rejected." So it remains to be seen whether it will be approved on Saturday, which means there is still a chance for a no-deal Brexit – although the more likely scenario would be for the Prime Minister to follow the law and request the EU for a Brexit deadline extension, which then opens up more uncertainty.
So, while risk assets are cheering the news today, it could be a different situation next week. In fact, we may see some sort of a negative reaction as early as later today with investors who bought the rumours go on to sell the news.
As far as gold is concerned, I continue to think that — despite Brexit optimism and positive signs from the US-China trade situation — the metal may be able to extend its advance over the coming days, now that it has worked off its overbought conditions due to its recent consolidation following a four-month rally that lasted until September. That rally was explosive, which took prices out of a 6-year consolidation range. So, it is likely in my view that there is more juice left in that rally - even if some of the previous concerns relating to Brexit and US-China trade have eased a little.
Meanwhile, the US dollar has remained on the back foot following the release of disappointing US retail sales on Wednesday, which raised concerns over the US economy and supported expectations that the Federal Reserve will cut interest rates at its next meeting.
With the Dollar Index (DXY) now in its third down week, safe-haven gold stands ready to benefit from any bouts of volatility in the stock markets, geopolitical tensions or any other sentiment-sapping event.
Source: Trading View and FOREX.com.
As before, while a return to $1350 long-term support cannot be ruled out, I think given yesterday’s price action when gold formed a bullish-looking candle on its daily time frame and the fact that the metal was able to rebound quickly today after initially spiking lower on the Brexit news, goes to show investors are still interested in the yellow metal despite the ongoing risk rally.
Gold now needs to break resistance around $1498-$1500 area in order to brighten the short term outlook, while a rally outside of the bull channel would be a more decisive signal for the bulls.
For the bears, gold needs to break below Wednesday’s low around $1477 in order to trigger fresh technical selling. If this happens then a drop to that long term support around $1450 would become highly likely.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.