XAU/USD: Correction is Possible Amid Profit Taking in Short Positions. Fundamental analysis of 20.05.2016
After the release of minutes on Wednesday and indication by the US Fed authorities of the possibility of the interest rates increase in June, the dollar has strengthened in the foreign exchange market. The minutes said that if in Q2 economic data will show economic growth and improvements in the labour market, and if inflation will approach the target of 2%, it is be possible to increase interest rate in June.
US data released on Thursday showed that last week, the number of initial applications for unemployment benefits has dropped sharply. This was the highest decline since the beginning of February. It shows that US labor market is improving, which is another factor in favor of the interest rate increase in June.
Higher interest rates usually put pressure on gold. Borrowing costs for its acquisition and storage is growing and gold cannot compete with the more profitable and safer assets, such as Treasury bonds.
Since the beginning of this year the price of gold has grown by 18% as investors bought gold as safe haven asset. In Q1 2016 the price of gold demonstrated the highest growth over 30 years.
On Wednesday, in anticipation of the minutes of FOMC meeting, and especially after the release of the minutes, spot-price of gold has dropped. Within 2 days the price fell by 25 USD per ounce. On Thursday, at COMEX June futures of gold fell by 1.5% to 1254.80 USD per troy ounce. USD index WSJ, comprising a basket of 16 currencies, has grown by 0.1% to 87.56.
Today, at the end of the trading week, gold is traded in the narrow range at the level of 1254.00. The pair may undergo correction amid profit taking in the short positions in the pair XAU/USD. However, today, the rise is unlikely to exceed the levels of 1258.00, 1263.00.
Pressure on the price of gold will continue until 15 June, when the US Fed will take interest rate decision.