Corrective Move Likely In Gold

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MyFXspot.com Trade Ideas:

XAU/USD: buy at 1250.00, take profit at 1320.00, stop-loss 1215.00

Market Overview

Looking into financial markets in mid-January it seems that investors are not worried by the government shutdown in the USA. The key question to be answered is if the US yield curve can really invert indicating high risk of recession. At the moment the spread between the 10, and 2-year treasury yields is close to 15 bp., but many analysts are worried that tensions related to trade war and waning impact of tax cut will be reflected in falling corporate outlays, making the money flowing from real economy into long term bonds. Clearly, recession risk is high and many investors want to stay away from risky assets.

On the other hand, business may shift costs that increased due to trade war on their customers so that negative adjustment in real economy would eventually be limited. It is also possible that mergers and acquisitions will intensify. In both cases recession would probably not take place and the US yield curve would steepen from the current, close to zero, levels.

The latter scenario may be very tempting for risk loving investors as the market sentiment in late 2018 was close to extreme. Perhaps that is why the first weeks of new year brought strong jump of the S&P 500. Earlier, the index might have started to discount recession while now the baseline scenario is just a slowdown.

With no data that could spoil sentiment in calendar, markets may move according to technical signals. In case of stock indices there is still some space for bulls as the nearest resistance on the S&P 500 is the 100 DMA at 2730 pts., which is 2.3% above the Friday close. This level may be tested in a couple of days but seem unlikely to be breached. In case of DAX, there nearest resistance is the level of 11472 pts., around 3.5% above the current level. German market obtained support on Tuesday as the expected economic sentiment, given by ZEW index, surprised on the upside amounting to -15 pts. The preliminary PMI reading for January, scheduled for Thursday, is expected slightly above its value in December so positive sentiment may continue, at least in short term.

The recent improvement in stock markets has not been however reflected in gold market. It is interesting that the gold/silver ratio has been growing for the most of January after it fell sharply in the end of December. Still, in short term, gold price has limited room to increase. In fact, the baseline scenario is the downward correction towards USD 1250.

Corrective Move Likely In Gold

Gold:Silver

Economic research and trade ideas by MyFXspot.com

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