The XAU/USD pair (Gold vs. the American dollar) scored a gain of 1.1% on Wednesday after Fed’s Vice Chair Janet Yellen signaled that she backed continuation of the $85 billion/month ($40 billion of mortgage-backed securities and $45 billion of Treasury securities) asset-buying program. Yellen said “We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession.
Unemployment is down from a peak of 10%, but at 7.3% in October, it is still too high, reflecting a labor market and economy performing far short of their potential. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy” in testimony prepared for her nomination hearing today before the Senate Banking Committee. In my previous analysis, I had said that despite last week's optimistic GDP and non-farm payrolls data, Fed policy makers would need more evidence to pull the trigger. Since Yellen's comments raised some doubts over whether the Federal Reserve will start reducing its massive stimulus as early as next month, the bulls might try to take advantage of that in the near-term.
From a technical perspective, I think the odds favor a bit of a bounce as long as the 1261 support holds but there are strong resistance levels ahead of us. To the upside, there is an interim resistance at 1288 but the first important challenge will be waiting the bulls at the 1293 level. A break above this level might give the bulls extra power they need to march towards the Kijun-sen line (twenty six-day moving average, green line) which currently sits around the 1306 level. If the XAU/USD pair encounters heavy resistance and prices reverse, there will be support at 1277 and 1268. A daily close below the 1261 support level would suggest that the bears are firmly in control.
