Daily Report: Gold bears in control

In a week where the currency markets are perhaps consolidating before both a European Central Bank (ECB) rate decision and US Non-Farm Payroll report, investors would perhaps benefit from looking for opportunities elsewhere. Therefore, attention should be directed towards Gold because a crucial technical move has occurred in the past few days. At the beginning of the week, Gold finally extended below the psychological $1180 support level and the metal has since extended to levels not seen in over four years.

It was only Tuesday afternoon that I commented regarding the potential for a strong NFP to send Gold towards $1153 to conclude the week. By the time I arrived in the office today, the move had already occurred. Extended below the long-term $1180 support level was something investors had been waiting some time for. Now the level has been breached, it is conceivable to admit the bears are now in control of the longer term future for Gold. Short term swings slightly higher shouldn’t be ruled out of the equation, but we are looking at the potential for a strong NFP concluding the week now perhaps sending Gold to the low $1100’s.

One other story attracting headlines over the past 24 hours involved the US Trade Deficit widening in September with exports unexpectedly declining due to the higher USD. Due to other US economic releases performing strongly at present, this isn’t a huge concern for right now. However, the previous FOMC Minutes release did strongly signal the higher valued Dollar was causing some anxiety among the Fed. If a decline in exports continues, it would likely lower future GDP readings and therefore delay the Federal Reserve from monetary tightening.

Other than that, the early morning headlines are being dominated by the Republican Party winning control of the US Senate. However, this is yet to have any impact on the currency markets.

The EURUSD is currently looking lower, perhaps due to suspicions that this morning’s PMIs might follow Monday’s pattern and be revised lower. Similar to Monday, this would not be great news, but it shouldn’t be overlooked that this is the first time the PMIs have returned to growth for some months.

The major movement has been in the GBPUSD, with the Cable already extending below 1.60 during the early hours of Wednesday morning. The pair has declined by 60 pips and even fallen through 1.5970 support at the time of writing. Later this morning, the UK Markit Services PMI for October is to be announced. The current expectations are for the PMI to have slowed marginally in comparison to September’s 57.4. The Services sector does compose both the largest GDP component and 80% of the UK labour force, therefore it would not surprise if confirmation of a slight slowdown resulted in the Cable finding support around 1.5940 this morning.

The other likely contributor behind the GBPUSD downside movement is that for an economy recently declared by the IMF to be the fastest growing in the advanced world, which also already has two dissenters voting for a rate increase, the overall tone from the BoE is dovish right now. There are strong concerns the EU economic issues will have a detrimental impact on the UK economy. So far, data validating these concerns has been limited, but the concern is still substantial enough to weaken investor attraction to the GBP.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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