U.S. Dollar Breakout Rally Pressuring Gold Futures

Short-covering triggered another surge in the U.S. Dollar, hitting December Gold with a fresh round of selling pressure. Shortly after turning the main trend to up on the daily chart, gold ran into resistance when it entered a major retracement zone at $1342.50 to $1364.09. Although the move initially stopped the upside momentum, long investors held out hope that the Fed would make an announcement that would launch a continuation of the rally. When the Fed disappointed, investors had no choice but to liquidate their long positions.

Since the main trend is up and the fundamentals still overwhelmingly bearish for the dollar, the current break in gold could actually be a correction. This will be decided when the market tests the retracement zone at $1306.40 to 1293.33. Buyers may decide that this is a value zone and may start to buy again. One reason investors may be attracted to the long side will be stock market weakness. If equities continue to sell-off hard, hedgers may begin to buy gold for protection.

The Fed’s assessment of the economy and worries the sluggishness will continue, helped to push December crude oil futures lower on Thursday. Crude oil investors are worried that a slow economic recovery will lead to a drop in demand and an increase in supply.

Tomorrow’s U.S. Non-Farm Payrolls report may also be raising some concerns about the strength of the economy. On Wednesday, traders reacted negatively to the report from ADP which showed the private sector added only 130,000 jobs. Analysts are being forced to issue downward revisions to their estimates of the U.S. jobs market. Traders are also aware of the possibility of a few surprises since this report will reflect the impact of the government shutdown on the employment situation. Technically, a sustained move through $95.95 could trigger an acceleration to the downside with $91.05 a potential downside target.

The strong rally in the U.S. Dollar is also hitting the Euro hard. For weeks, investors had questioned the rally to 1.3800. Many EUR/USD investors felt that the Euro Zone economy was not strong enough to sustain this lofty price level and that the weaker U.S. Dollar was pushing it higher rather than buyers. Now that the dollar is moving higher and recovering from its sell-off, Euro investors are seizing the opportunity to take profits in an effort to drive the Forex pair back to more reasonable price levels.

Fundamentally, the EUR/USD fell the most in nine weeks on Thursday after the inflation rate in the Euro Zone unexpectedly fell, fueling speculation the European Central Bank will be forced to cut its benchmark interest rate to boost the economy. The big surprise in the inflation number creates a dovish situation for the ECB. This news combined with extremely overvalued conditions could trigger the start of a long-term correction.

The GBP/USD traded flat on Thursday, following a five-day sell-off. Oversold conditions are giving investors the opportunity to take a breather and reassess the near-term outlook for the Forex pair. Fundamentally, investors are concerned the economy is not strong enough to support the market at current price levels. Investors seem poised to take this market lower over the near-term to realign the market with is truly occurring in the economy.

Pressure had been building for weeks because a series of strong economic reports had been interpreted by investors as bullish, leading them to conclude that the Bank of England had enough information to begin raising interest rates sooner-than-expected. The central bank, however, basically put an end to the rally by issuing statements to the contrary. In addition, the recent BoE minutes suggested that speculators were not on the same page as the central bank. Look for the weakness to continue until the GBP/USD reaches a value zone near 1.5750.