Gold Rallies on Weak Holiday Volume

Volume is light in the Forex and commodity markets today because of the U.S. bank holiday. Trading is thin because of the early commodity market close. Normal trading conditions will resume on Tuesday.

A sell-off in the U.S. Dollar helped trigger a surge in February Gold futures today. The move in gold changed the main trend to up on the daily chart, making $1233.50 a new main bottom. In addition, new support was established at the retracement zone bounded by $1234.61 to $1224.45.

On the upside, under thin trading conditions, gold took out the recent swing top at $1255.30 to turn the main trend to up. If upside momentum continues then look for an early drive to the last swing top at $1267.50. Upside momentum may continue to over the near-term, but the rally may become labored inside the main retracement zone bounded by $1271.85 to $1293.20.

Fundamentally, gold rose because of the weaker dollar. A weak dollar tends to make gold more attractive to foreign traders. In addition, traders are buying gold as a hedge against a possible sell-off in the equity markets.

February crude oil traded weaker during a limited session. The new short-term range is $91.24 to $94.94, making the retracement zone at $93.09 to $92.65 the next likely downside target.

Fundamentally, supply at record levels and concerns about demand are helping to weigh on prices. Although the market has had seven consecutive weekly drawdowns in inventory according to the Energy Information Agency, rallies have been scarce and when they have occurred, they have been met with aggressive selling pressure. Traders also believe that despite cutbacks by OPEC, production in the U.S. should more than make up any shortfalls. Also Iran and Libya are set to resume production.

The GBP/USD closed higher on Monday in limited price action. The Sterling appreciated after an industry report showed an increase in U.K. house prices this month. The reaction to the news was limited because of the U.S. holiday. In addition, many traders took to the sidelines ahead of this week’s U.K. unemployment report. This report is important because the Bank of England will consider raising interest rates when the unemployment rate reaches 7 percent.  The central bank is also scheduled to release its latest minutes on Wednesday.

The EUR/USD reversed to the upside following an early sell-off. Technically, traders are reacting to oversold conditions and a small penetration of a Fibonacci level at 1.3523. Holding this level could trigger a move into the 50% level at $13593.

Traders are worried that the strong U.S. economy will mean another round of tapering by the Fed in January. In the meantime, reports indicate a sluggish Euro Zone economy, suggesting the European Central Bank may have to apply fresh stimulus measures to jump start the economy.