Gold prices rallied today as the dollar struggled to produce gains. The dollar index, although well off the lows of the session, was up a minor 0.05% in afternoon trading today. The dollar is struggling following the release of disappointing Housing Starts data. Housing starts declined 9% in September to a seasonally adjusted annual rate of 1.047 million units, below consensus estimates. However, the data was not all bad, as permits increased 6.3% to a seasonally adjusted annual rate of 1.225 million, modestly above consensus. The dollar, however, remains locked in a consolidation phase while gold prices, in turn, followed through on Tuesday’s advance. The contract for December delivery reached $1,274.4 for a high, its best level since October 5th. Settlement was at $1,269.9 an ounce, up 0.55% and confirming a break above resistance at $1,267.6, representing the high of October 7th’s wide price swing.
The next level of chart-based resistance does not come into play until the $1,306-$1,309 level, given the October 4th steep slide in prices. Thus, Fibonacci retracements of the decline from the September 22nd high through the October 7th low are now defining potential resistance levels. A 38.2% retracement would leave gold prices at $1,282.7, while a 50% retracement would call for a move to $1,295.
As a result of the recent advance in gold prices, the extreme oversold condition that resulted from the 7% drop that took place in late September/early October has eased. The absence of an oversold condition and the ongoing expectations of an interest rate hike call into question gold’s ability to extend the recent recovery on a sustained basis.
So far this week, economic data has done little to damage the probabilities of a rate hike by the Federal Reserve at the December meeting. September year-over-year CPI was reported at 1.5% on Tuesday, in line with the Fed’s long term inflation target of 2% and the largest 12-month increase since October 2014. At present, Fed fund futures are indicating a 69% chance of a rate increase at the December meeting, up from 65% as of Tuesday’s close.
On Thursday, the data calendar is heavy with releases, including Jobless Claims, the Philadelphia Fed Index, Existing Home Sales and Leading Indicators. In addition, the European Central Bank policy meeting is on tap tomorrow. This is a particularly important meeting for the ECB, as there is only one additional meeting prior to the end of 2016. Interest rates are expected to remain unchanged for a fifth straight meeting. However, there will be an important focus on the bond-purchase program, which is due to come to an end in March 2017.
Should sellers step back in, first support is now at the just-broken resistance at $1,267.6. A drop below this level would negate the short term bullish implications of today’s price action and call for a return to the October low at $1,243.2. Support below this level is in the vicinity of the $1,200 level, which was tested with the lows established in February and late May of this year.