GOLD Reverses Strongly On Weak U.S Data – Will the $1350 Level Hold?

Gold rallied nearly 200 pips, equivalent to 1.3% to $1355.56 per ounce troy after much-worse-than-expected data on U.S retail sales and producer prices. The precious metal has covered all of its losses from Thursday.

Gold prices jumped sharply following data published by the Commerce Department that reported that U.S advance retail sales for July were flat, compared to a revised figure of 0.8% for June. Core retail sales, which strip out auto sales, dropped 0.3% last month, compared with a revised figure for June of 0.9%. Both figures that were released today fell short of expectations, as economists had expected the retail sales and core retail sales to come in with a rise of 0.4% and 0.2%, respectively.

In a separate report by the Labor Department, U.S. producer prices unexpectedly tumbled 0.4%, the first decline since March and the largest since September 2015. The fall, that was mainly caused by declining costs of services and energy products disappointed analysts that had forecast the PPI to edge up by 0.1 percent, especially after the 0.5% rise in June.

Compared to one year ago, the PPI slipped 0.2 percent after rising 0.3 percent in the 12 months through June. Economists had forecast the PPI gaining 0.2 percent on a year-on-year basis. Energy prices fell 1.0 percent while prices for services fell 0.3 percent in July.

A gauge of underlying PPI that excludes food, energy and trade services was unchanged last month after rising 0.3 percent in June. The core PPI was up 0.8 percent compared to a year earlier but remains far away from the Fed’s 2 percent inflation target.

Apart from the strong labor market, an inflation moving towards the Fed’s target level will be a motivation for the Fed to undertake another rate hike. However, a strengthening dollar and cheaper oil continued to keep prices low last month, leaving  price growth weak. The possibility of the Fed tightening rates this year has lowered to 34.3% from above 40% before the data release today.

Higher interest rates in the US would greatly reduce the appeal of no-yield assets like gold as fears over economic stability subside and yields on risky assets improve. Therefore, falling probabilities of the Fed raising rates means strengthening bullish momentum for the precious metal.

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Fig: GOLD H4 Technical Chart

GOLD has seen a significantly strong up-move which briefly pushed the price to surge beyond the trend line. The precious metal moved past the 20MA and 50MA at 1342.81 and 1348.28, respectively and the two moving averages are currently placed the price action, lending support to the market. The resistance at $1355.00 remains a tough one to breach, even though gold has reversed into a bullish posture. We may need to wait for the price to break this level conclusively, before further targets can be estimated

Trade suggestion

Buy Stop at 1355.00, Take profit at 1360.00, Stop loss at 1349.50

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