Technical Factors Drive Gold Through Key Support

February Gold futures broke sharply on Wednesday as mostly technically-based traders drove the market through the psychological $1700.00 price level. The selling began in Asia and carried over into Europe. The early session weakness caught traders by surprise. The decline wasn’t attributed to fresh short-selling, but traders commented that stop losses were hit under $1700.00. A slightly better U.S. Dollar also contributed to the weakness as traders sought solid fundamental reasons for the decline. 

February crude oil futures also weakened amid concerns that the “fiscal cliff” would push the U.S. into a recession. The $90.00 level remains solid resistance. Support is at $85.00. Technically, the market could be called rangebound. Traders have been selling retracements which is a sign of weakness so one has to conclude that there is a bias to the downside. 

Overnight, European Union finance officials agreed on a deal that would create a single bank supervisor and EU banking union. Trades considered this to be positive news, helping to give the EUR/USD a slight boost as interest rates fell in both Spain and Italy.Greece also was approved to receive a fresh tranche of EU bailout money. 

The GBP/USD failed to follow-through to the upside on Thursday after a report showed the majority of U.K. manufacturers are seeing weaker orders. This report attributed to some of the uncertainty in the market as investors continue to debate whether the economy is poised to re-enter a recession during the fourth quarter. 

Traders are still trying to assess the impact of the Fed’s latest statement. On Wednesday, the Fed ended its “Operation Twist” program but extended its long-bond-buying program by an additional $45 billion a month. The news was largely expected by traders. Based on the Fed’s decision, interest rates are not expected to rise for at least three years. This has the potential to keep downside pressure on the U.S. Dollar. 

The Greenback may catch a bid, however, as theU.S.moves closer to the “fiscal cliff”. Politicians appear to be locked into their positions which may mean theU.S.faces the possibility of damaging its economy. This is something that Fed Chairman Bernanke made clear, the Fed could do very little to repair. Risk appetite could decline if government officials can’t reach a timely decision. This could underpin the dollar while putting pressure on currencies and commodities.