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May 25, 2017

BY FX Analyst Matthew Ashley

Loonie Poised to Bounce Back as the Week Closes

The Loonie has been under fire recently but things could be about to improve for the embattled pair in the session to come. Specifically, a number of technical signals are now shifting their bias which suggests a reversal is now on the way. What’s more, now that the BoC’s interest rate decision is done and dusted, there is little in the way of a rally from a fundamental perspective which should see the technical bias leant on somewhat more heavily moving forward. Two of the clearest indications that selling pressure may have finally reached an impasse come from the 100 day EMA and the medium-term trend line. Looking first at the moving average, it’s fairly plain that dynamic support provided by the 100 day measure is exerting some degree influence on the pair – effectively stalling the prior session’s rather voracious plunge lower. As for the trend line, the fact that the pair has respected the line could be a signal that the uptrend is not done just yet and this latest tumble is merely a correction in a longer-term trend. However, even if this is not the case and we are instead nearing the end of the recent uptrend, we can expect to see at least a little bit of bullishness moving forward. Aside from the factors mentioned above encouraging buying pressure, the movement of stochastics into oversold territory will also be spurring the bulls on. Furthermore, the Loonie is testing the lower boundary of its highly divergent Bollinger bands – a sign that we can expect to see it trend back to the basis line shortly. In the event that the reversal highlighted above does occur, gains are likely to run into resistance at around the 1.3554 handle. The combination of not only a historical zone of resistance but also the 38.2% Fibonacci level and the basis line of the Bollinger bands around this price should prove more than a match for the bulls who are already on shaky ground. However, there is a slim chance that the overarching bullish trend does continue and trace out a three drive or something similar. This being said, we will need to see the Loonie above the 1.37 handle before we can begin to speculate on such a pattern taking shape.  Ultimately, keep an eye on the pair as, whatever happens, it’s likely to be interesting. In particular, monitor the Loonie as it approaches the 1.3554 mark as, if it breaks above this level, it could signal that further gains are on the way. Nevertheless, given that the effects of the ‘Trump Bump’ have largely dissipated, it pays to be somewhat pessimistic regarding ongoing USD strength and err on the side of caution.

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May 25, 2017

BY Senior Market Strategist steven knight

U.S. GDP Growth Likely to Remain Under 3% Target Unless Productivity Improves

The current American political cycle could be characterized by its bitter in-fighting and drive towards the partisan side of the fence. In particular, the debate over the U.S. economy appears to be another form of nationalism that both Republicans and Democrats use as a weapon in the war of words over which ideal is best for the economic growth of the nation. However, the truth is that neither party possesses a platform of sincerity and honesty and that without addressing the elephant in the room, productivity, we are unlikely to see a 3% GDP growth rate in anything other than our dreams.   The reality is that the current focus within Washington, as well as financial markets, has largely been centred on hikes to the Federal Funds Rate (FFR), as well as delivering a national budget with plenty of pork for the voters. It appears that both the White House and Congress are hell bent on again resorting to increases in debt to drive a `supposed’ economic recovery and real gains in both jobs and wages. In fact, Trump’s latest budget costing represents a sharp drive to the debt side of the equation and could almost be viewed as the republican version of fiscal stimulus.   However, most economists universally accept that there are limits on how much increased government debt can fuel economic growth, which tends to play into the old adage that there are no free lunches. The reality is that increased monetary and fiscal stimulus has largely failed at producing the sort of GDP gains that the Whitehouse, and the American public, are seeking and that the cost/benefit of the packages are now seriously out of whack. Simply put, eight years of loose monetary policy and QE have had little impact on growth outcomes for America. Subsequently, it makes little sense to undertake the same activities, and expect a different outcome, without addressing the underlying weaknesses.   Most of the economic literature on growth seems to suggest that total factor productivity (TFP) is largely responsible for many of the economic success stories around the globe. In particular, Singapore has experienced huge gains in TFP over the past few decades and, as such, has experienced a wave of economic growth that is admirable. Much of the gains are largely from technological innovation that increases both national and worker productivity and results in a lean and competitive economy in global terms.   However, a cursory review of U.S. Worker Productivity Growth paints a bleak picture as the metric has clearly been within a downtrend over the past 17 years. Although fairly volatile, the indicator clearly demonstrates that the U.S. is losing ground yearly in a global economic battle on productivity and innovation and this certainly doesn’t bode well for GDP gains in the near term. Subsequently, the time might finally have arrived where the political and economic leaders of the U.S. might have to actually address the ongoing slide in domestic worker productivity lest American industries continue to lose their competitiveness in the global market. However, instead of debating the underlying limitation of Keynesian stimulus, or incentivising corporate investment and innovation, Washington instead retreats to political partisanship and ideology. Largely, the reason for the avoidance of any real debate on the issue is that fact that a technological revolution is coming within the Western world that threatens to cause significant structural unemployment. Machines and technology are poised to revolutionise some sectors and I think many of us can already see the changes with the advent of automatic checkouts at the super market, or online ordering at McDonalds. These innovations are certainly starting to have an impact in the lower skilled worker categories and will continue to do so over the next decade. So now is the time for the U.S. government to start the process of transition in training and upskilling employees to work in different industries with increased worker productivity. However, this requires significant political will and leadership in a time when Washington lacks both.  Ultimately, the reality is that the U.S. is unlikely to see the sort of economic growth they are hoping for whilst there are continuing drags on the domestic economy from poor productivity and increased global trade competition. In addition, a too low for too long monetary policy has reduced the incentive for a drive towards innovation and has, instead, promoted growth through increases in corporate and personal debt. Subsequently, don’t expect the 3.00% growth target to be reached any time soon unless all of these underlying problems are recognised and fixed. 

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May 25, 2017

BY FX Analyst Matthew Ashley

Daily Currency Performance Round up

Wednesday 24th of May 2017

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May 24, 2017

BY Senior Market Strategist Steven Knight

The Impact of Moody’s China Downgrade on FX

The last 24 hours has been a watershed moment for the Chinese economy, as well as the Yuan, as Moody’s have moved to decisively downgrade the countries credit rating from A1 to Aa3. Although markets have reacted with shock, the reality is that macro economists have, for some time, questioned the veracity of China’s economic reporting. Subsequently, it comes as no surprise that Moody’s have finally taken action to confirm a negative outlook for the manufacturing power house. However, it remains to be seen what impact the downgrade will have specifically on the FX markets.   Subsequently, at the time of writing, the USDCNY is currently trading around the 6.8945 mark and the pair has seen plenty of upside momentum which is likely to continue in the coming session. This is a direct effect from the credit downgrade as the market starts to focus on the rising Chinese debt levels and stalling economy. In addition, most economists have suggested that indirect and contingent liabilities will continue to increase and that we are likely to see debt levels around 40% of GDP by 2018. Clearly, this sentiment is likely to be reflected in the FX markets in the coming weeks as traders continue to pile up against the Yuan.   The first impact has largely been to do with restricting capital flows in the aftermath of the credit downgrade. This has seen the PBOC setting stronger daily Yuan fixings to offset some of the capital outflow pressures that have been evident during today’s session. However, this is little respite given the trading pressures around the onshore Yuan and the high demand for the U.S. Dollar. Subsequently, despite firmer fixings, the capital outflows are likely to accelerate in the face of the credit downgrade and this poses a problem for the PBOC in their management of the Yuan.   Subsequently, the Chinese authorities are likely to have to revert to FX interventions in an attempt to help stem the flow of capital from the Asian powerhouse. However, this poses its own difficulties as the nation will need to access their foreign currency reserves to stump up the Yuan’s value and, typically, that can be a losing proposition given the difficulties in holding back the market.   Ultimately, the next few months are likely to be relatively rough for both the onshore and offshore Yuan and a slow but concerted depreciation is likely to be the order of the day. However, be mindful of the risk of FX intervention by the PBOC because, in all likelihood, they are going to be unwilling to give up the battlefield without a solid fight first. Whichever way you look at it, concern about an economic slowdown in China is likely to grow beyond the implications for an FX market, especially if there is a further fall in global trade.

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May 24, 2017

BY FX Analyst Matthew Ashley

The Euro Could be Moving into the Final Stages of an Elliot Wave

The Euro’s most recent surge higher is beginning to show signs of cracking as the bears are now putting up a bit of a fight. Indeed, last session’s slip could be the start of a rather pronounced tranche of losses that may see the pair back down at around the 1.0971 level. Although, things aren’t altogether grim as this may actually be a necessary correction in the Euro’s journey all the way back to last year’s highs.  Firstly, let’s take a look at just why a reversal and subsequent slip back to support is warranted. One vital reason to suspect a change in bias is the stochastic oscillator which is clearly overbought. However, given that this has been the case for some time, it alone is unlikely to convince the bulls to give up the ghost just yet. Fortunately, if we focus in on the last two candles it also becomes clear that we have either a tweezer top or bearish engulfing taking place which would also suggest losses are now on the way. Incidentally, this bearish reversal is occurring at around the right price for an Elliott wave’s third leg to complete. As shown above, the recent spate of gains has stalled at the 1.1233 mark which had been a likely candidate level for a reversal given the historical resistance present at this price. Importantly, this leads us into the second part of our forecast which is concerned with how far we expect to see the EUR tumble and how high we expect the following rally to carry the pair. Currently, it is assumed that any near-term decline could reach as low as the 1.0971 mark before the bulls regain control. Such a tumble would be appropriate for the above Elliott wave and would also respect the 38.2% Fibonacci level. As a result, it would in all likelihood, require a major fundamental upset to see support at this level broken, especially as the 100 day EMA will be a source of dynamic support around this price.  Due to the relative robustness of the forecasted support level, we remain tentatively optimistic that a secondary reversal would occur around here. This should, in turn, lead into a period of gains for the EURUSD which might extend as high as the 1.1354 mark by late July. Bullishness beyond this level is currently doubtful as we would then begin to stray into the highs of last year which may prove to be a medium to long-term limit amid the ongoing Brexit fears.  Ultimately, even if the long-term bias is incorrect, the near-term slip is looking rather likely. As mentioned, the combination of being overbought and the historic zone of resistance around the 1.1233 level should be more than a match for the already exhausted bulls. However, as always, keep an eye on the fundamental side of things as the ECB has been toying with the idea of raising rates as early as June which could prematurely end the forecasted downtrend. 

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May 24, 2017

BY FX Analyst Matthew Ashley

Daily Currency Performance Round up

Tuesday 23rd of May 2017

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May 23, 2017

BY FX Analyst Matthew Ashley

Is Silver’s Rally Running Short on Momentum?

Silver prices have been recovering strongly over the past few sessions and have now reached the near-term peak that was forecasted for the metal a short while ago. However, given the fact that Trump is on the loose internationally and calls for his impeachment remain fresh, we may have to delve back into the technical forecast to ensure a revision of our expectations is not warranted just yet. Firstly, it is relatively clear on the below chart that buying pressure is about to face some notable technical hurdles in the coming days, despite the apparent underlying shift in sentiment for silver. In particular, the presence of the 38.2% Fibonacci level and a historical zone of resistance around the 17.224 handle will be giving the bulls pause for thought which is in line with our earlier forecasts. However, something that wasn’t clear last time was just where the 100 day EMA would be situated and what role it might play in capping upside potential. At the movement, we actually have a little more room to move before this average begins to seriously exert some selling pressure on the metal. As a result, we may see some more bullish momentum moving ahead that could mean gains extend up to around the 17.400 handle. Nevertheless, despite the apparent need for an upward revision of our near-term high, we still expect to see the metal enter a bearish phase within a week or so. This is largely due to the overall configuration of the EMA’s which remains highly bearish. However, the stochastics also shouldn’t be ignored as they are deeply overbought as a result of the past few sessions of strong buying activity. From a more fundamental perspective, Trump’s international engagements and the fallout from the Russian investigation are generally expected to generate some negative market sentiment this week. This will almost certainly buoy silver prices which would be in line with the upwards revision of our near-term high but it might also work against the subsequently forecasted slide. As a result, keep half an eye on the news feed as Trump’s antics may slow silver’s potential decline to a crawl. Ultimately, whilst we might see a more buying pressure coming down the line, we are still expecting to hit a near-term peak for silver prices in the coming week or so. Additionally, we expect to see the metal move into decline fairly shortly after – even with Trump posing a bit of a threat to this forecast. 

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May 23, 2017

BY Senior Market Strategist Steven Knight

NZDUSD Gets Ready to Challenge Trend Line

The Kiwi Dollar has faced some sharp swings over the past few weeks as the pair has reacted to a range of changing U.S. Dollar sentiment. Subsequently, the pair has largely rallied over the last trading session and finally reached the declining trend line. However, it remains to be seen if the pair can retain its current level and potentially rise above the key 70 cent handle.   In fact, taking stock of the 4-hour chart is particularly illuminating and actually demonstrates the strong rally that price action has undertaken over the past few days. However, the technical indicators are suggesting that momentum might actually be stalling for the bullish pair. In particular, the RSI Oscillator has now ticked into overbought territory which suggests that a pullback might be on the cards in the coming days.   In addition, price action is facing some stiff resistance around the 70 cent handle, which has been a key reversal point in the past. The level has been seen as a psychological zone of resistance and the market will be watching the handle closely for any signs of a change in trend.  In fact, given the historical validity of the declining trend line, any further gains will in all probability be limited.Fundamentally, the Kiwi Dollar is also potentially over valued given that inflationary pressures and GDP gains are still within the recovery phase. Additionally, the only economic indicator largely supporting strong growth is the global dairy trade numbers, which have continued to improve over the past few months. Additionally, the U.S. economic data continues to point to tightening within the labour market which is likely to lead to monetary policy action from the Fed in the coming months. Subsequently, there are plenty of reasons to suggest that we might see additional moves to the short side in the coming weeks.  Ultimately, the most likely scenario for the pair in the coming session is an abject failure to breach the declining trend line and then a steady depreciation against the greenback. This is further supported by the various oscillators’ overbought status and the need for a period of moderation or a pullback to relieve the pressure. Subsequently, keep a close watch for a failure around the 70 cent handle and then a steady move lower back towards support around the 0.6900 mark.

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May 23, 2017

BY FX Analyst Matthew Ashley

Daily Currency Performance Round up

Monday 22nd of May 2017

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May 22, 2017

BY FX Analyst Matthew Ashley

Is Gold Really Recovering or will it Correct Lower this Week?

Gold reversed its fortunes somewhat last week, moving higher and ending what has been its worst tranche of losses in a while. As a result, it may be worth taking a closer look at what was driving this price action and what it could mean moving forward. In particular, we should take a look at the fundamental and technical factors that have been impacting, and will continue to impact, the metal this week. Starting with the week that was, last week saw gold have some of its best performance in some time despite a notable slide on Thursday following the uptick in the US Philadelphia Federal Manufacturing Index. Most of the gains came as a result of the market taking a risk-off approach on Wednesday as allegations swirled that Trump had interfered with the FBI investigation into his ties to Russia. The session saw US stocks go into free fall and the VIX spike from 10.61 to 15.59 – both developments encouraging traders to retreat to safe havens. The ultimate effect of the fresh bout of geopolitical risk meant that gold closed the week substantially higher at around the 1255.27 handle. From a technical perspective, the big development has been gold surging above its 100 day EMA and the convergence of the 12 and 20 day averages. Taken together, this would suggest that gold is potentially entering a new uptrend. Interestingly, this would be in agreement with the Parabolic SAR reading which has been indicating that this has been the case for some time. Moreover, it would tend to indicate that the uptick in buying pressure last week is more than a knee-jerk reaction. However, contrary to this, we have also seen stochastics trend almost into overbought and the existence of a historical reversal point near the metal’s current price could limit gains without some strong fundamental support. Speaking of fundamentals, we are tentatively expecting to see this week’s data put pressure on gold. More precisely, the bevy of speaking engagements from FOMC members and the release of the FOMC Meeting Minutes will be watched closely by those seeking to gauge the probability of us seeing a rate hike in the coming meeting. Currently, the probability of a hike is around 76% and any increase in this following the scheduled remarks or the minutes release will put pressure on gold prices, leading to a near-term reversal for the metal. Ultimately, given the mixed nature of both the technicals and fundamentals, it’s fairly hard to form a bias moving forward. However, on the balance of things, the evidence seems to suggest that downside risks may be on the rise due to the increasing chances of a US rate hike and the presence of that technical reversal zone. As a result, we have a fairly bearish view for the week to come but keep an eye on Trump as he has a propensity to impact the market erratically. 

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May 22, 2017

BY Senior Market Strategist Steven Knight

Euro Likely to Remain Fairly Neutral in the Week Ahead

The Euro had a resoundingly positive week as the pair reacted to slipping greenback sentiment following a rise in U.S. political risk. In particular, news that President Trump might have attempted to interfere in the FBI investigation largely overshadowed the economic data. Subsequently, the Euro rallied sharply to close the week around the 1.1206 mark. Moving forward, monitor the U.S. Unemployment Claims and Core Durable Goods Orders figures.   Last week proved to be a positive one for the Euro Dollar after sentiment for the greenback sunk following news that President Trump might have attempted to influence the FBI investigation into the Russian election allegations. This caused an immediate rout to the Dollar and saw most of the cross pairs rising. Subsequently, the Euro gained strongly and rallied late into the week thereby closing around the 1.1206 mark. Fundamentally, the Eurozone GDP figures came in on target at 0.5% q/q whilst the CPI results proved robust at 1.9% y/y. On the U.S. side, the Unemployment Claims figures came in fractionally below estimates at 232k, whilst Industrial Production rose to 1.0%. Subsequently, despite a range of strong results from both economies, the focus was less about the results and more about the growing U.S. Political risk.   Looking ahead, the market’s focus is likely to be primarily upon the bevy of U.S. economic data due out in the coming week. In particular, the release of the Fed’s FOMC minutes will be closely watched for any signs that the central bank is gearing up for additional near term hikes. As far as actual data releases go, the Unemployment Claims and Core Durable Goods Orders are the key metrics that are likely to provide the market with some volatility. This time around, the Unemployment Claims are forecast at 238k but are likely to come in significantly below that level.  Subsequently, watch the pair for any sharp moves following the aforementioned events.   From a technical perspective, the extension of the rally above the 1.1200 handle has likely exhausted the current move with the RSI and Stochastic Oscillators now trending sideways within overbought territory. Subsequently, there is plenty of scope for either a period of moderation or a pullback which predicates a neutral bias for the week ahead. Support is currently in place for the pair at 1.1097, 1.0954, and 1.0873. Resistance exists on the upside at 1.1211, 1.1343, and 1.1425.   Ultimately, the week ahead is likely to be all about the coming U.S. economic data and, hopefully, falling political risk from the Trump administration. Subsequently, the U.S. Preliminary GDP and Core Durable Goods Order figures are likely to be the key components in the pair’s near term trend.

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May 19, 2017

BY Senior Market Strategist Steven Knight

Australian Unemployment Decline Surprises Market

The latest release of Australian Unemployment data has largely caught economists, and by extension the market, sharply by surprise.  In fact, rather than coming in at the forecasted 5.9% the unemployment rate actually declined to 5.7% in April.  Subsequently, the labour market appears to be going through resurgence but just how robust the current gains are remains to be seen.   The employment change figures for April showed a gain of around 37.4k jobs, which followed on from a rise of 60k in March. Obviously, this is a welcome strengthening of the labour market and should lead to some inflationary gains over the medium term. However, the headline rate was a little less impressive with full time positions declining by nearly 11.6k in April. Subsequently, the rise in part-time employment is a relatively concerning trend in the Australian economy.   In fact, the total hours worked metric declined by around 0.3% whilst part time employment has risen by over 111,300 positions in the past year. This all highlights the underlying reasons why the unemployment rate and job gain figures can be somewhat misleading. It also goes some of the way to explaining why there has been little in the way of systemic inflation over the past year, despite some strong gains in the employment numbers.However, despite the employment figures being somewhat unreliable as an macroeconomic indicator, the results are likely to be noticed by the Reserve Bank of Australia (RBA). In fact, there is a view that the recent gains may actually see the central bank delaying a potential cut to interest rates given the risk of inflationary pressures arriving down the line.  Subsequently, the next RBA meeting is likely to see the central bank holding rates at 1.50% for the tenth consecutive meeting. Lending further support to this view is the increasing domestic debt levels, largely to do with the housing bubble, that the central bank are very clearly concerned with. Subsequently, cutting rates further, and by extension, providing a looser credit environment is likely to not be particularly high on the RBA’s agenda.   Ultimately, although the falling unemployment rate is likely to be relatively welcome news to the Australian public. It hides deeper issues around the appropriateness of part time employment and what impact this will have on inflation in the medium term. Subsequently, don’t expect any action from the RBA at the next meeting as the central bank will, again, sit on their hands.

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May 19, 2017

BY FX Analyst Matthew Ashley

Oil Could be Setting up for Another Slide

We have seen oil prices make a substantial recovery over the past few weeks, largely erasing the rout following a breakout from the long-term rising wedge structure. Nevertheless, we are reaching what could be a near-term peak for the commodity as the technical bias is once again being felt and capping upsides. Specifically, the downside constraint of that wedge is once again in sight but, this time, it is likely to be presenting substantial resistance as opposed to support. Due to this, we expect to see the current rally stall shortly, especially given that 61.8% Fibonacci level is drawing nearer and is also intersecting the trend line just above the commodity’s current price. However, whilst this is a strong argument for a cap on gains, it doesn’t necessitate the decline in prices that we have forecasted on the below chart. Fortunately, we can look to a number of other technical readings and see that, in fact, we may indeed be about to enter yet another period of notable losses. In particular, the movement of the stochastics into overbought territory is suggesting that some selling pressure is needed in fairly short order. Furthermore, we can also see that, despite the recent upswing, the EMA configuration is highly bearish and the 100 day average is also well positioned to reinforce resistance around the 49.73 handle.  If the above technical forecast does ring true, we can expect to see losses extend to around the 46.03 level. At this price, the combination of a historical reversal point and the 23.6% Fibonacci level should prove to be a near-term trough for oil. Of course, this assumes that OPEC’s attempts to collude don’t implode spectacularly in the interim – an outcome that isn’t entirely impossible. If we do have such a breakdown in the cartel’s coordination, we might see the commodity well and truly below the $45 mark fairly rapidly. Ultimately, keep an eye on oil as it has been offering some fairly reliable technical moves over the past few weeks and it is likely to be in focus given that the OPEC talks are coming up next week. This could mean additional volatility is on the cards which presents an opportunity to net some pips amid the heightened headline risk. 

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May 19, 2017

BY FX Analyst Matthew Ashley

Daily Currency Performance Round up

Thursday 18th of May 2017

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May 17, 2017

BY Senior Market Strategist Steven Knight

Gold Nearing a Key Bullish Turning Point

The past 24 hours has seen Gold rally to a key medium term inflection point as the metal’s price action closes in on a bullish cross of the moving averages. It would appear that the metal might have finally discovered some key support which, unsurprisingly, appears to have been right on a supporting trend line. Subsequently, we could be about to see some resurgence in gold prices in the coming days.   In fact, price action on the daily charts is potentially spelling out the metals near term trend. Price appears to have discovered some support around the $1214.09 an ounce mark and, subsequently, has rallied over the past week. At the same time, the 100 and 50MA’s are converging at the same location and something is definitely getting ready to break. In addition, the RSI Oscillator has finally clawed its way out of oversold territory and is now trending higher and still has plenty of room to run on the upside. Subsequently, there are plenty of technical reasons to suggest that the metal is about to break above the 100 day MA and start a sharp rally towards our interim target of $1263.48 an ounce.Also, from the fundamental perspective, there is some weakness becoming apparent within the U.S. Domestic economy of late. In particular, the latest round of Building Permits and Housing Starts proved to be relatively flat and, subsequently, saw sentiment swinging against the greenback. Additionally, the Q1 GDP results proved relatively disappointing and there is some evidence of sliding consumer sentiment whilst inflation is still largely absent. Subsequently, there is a building case for the Federal Reserve to potentially hold off on any further rate hikes until we have the Q2 GDP results to review. This obviously bodes well for precious metals markets given that much of the downward pressure has been the pricing in of the central bank’s forward guidance on rates.  Ultimately, Gold is likely to undergo resurgence in the coming session given the aforementioned technical and fundamental factors. Currently, the air is coming out of the Dollar and we should start to see capital flows back into safe havens given the rising political risk within America. Subsequently, watch for a sharp break above the 100MA before a steady bid takes the metal higher towards our target at $1263.48.

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