Gold Rout Gets Week off to an Interesting Start

It’s been a quiet start to the week in the Asian session, with the bank holiday in Japan significantly hitting trading volumes. Although, there has been some interesting moves elsewhere, particularly in Gold which fell to a more than five year low and was down more than 5.5% at one stage.

Gold saw an enormous amount of interest overnight as a sudden sell-off in the precious metal triggered a number of stop losses, knocking almost $60 off the price in less than a minute. It has since stabilized to trade back above $1,100 but I expect interest in it to remain today.

Gold has looked bearish for a while now but the yellow metal had been supported by safe haven flows as Greece appeared to be walking blindly towards the exit door. However, with those flows being hit by a last minute deal that was reached and the Federal Reserve growing increasingly hawkish making a rate hike this year all the more likely, taking away its inflation hedge appeal, any support it did have has been significantly diminished.

Greek banks are expected to reopen again today although capital controls are likely to remain in place while the terms of the country’s bailout are agreed. Upon agreement, cash will be dispersed to recapitalize the banks, at which point the capital controls are likely to be lifted, albeit gradually.

The Greek story is unlikely to be as great a factor in the markets going forward with Greece appearing to have averted another serious crisis and the eurozone remaining in one piece. The next part should just be a case of formalities with the broader agreement in place and the Greek parliament already under way with the reforms.

This week is looking a little quieter in terms of large economic events and data. That said, we’ll get the minutes from the Bank of England meeting on Wednesday which could be very interesting given the sudden change of heart among some members of the monetary policy committee, most notably Governor Mark Carney himself. Suddenly, the central bank is looking much more hawkish and rather than the middle of next year, the end of this year is being suggested as the point at which rates could lift off from the record lows they currently find themselves at. The minutes, and voting, may shed further light on this.

Given this lack of catalysts on this side, there is likely to be increased focus on earnings for overall market sentiment, which could be a key driver this week. At a time when we’re looking to two of the largest central banks raising interest rates, it’s important to see company earnings heading in the right direction if the stock market is going to be supported. Loose monetary policy has offered a distraction for many years but I struggle to see how current levels can be supported in the absence of both monetary stimulus and good earnings.

The FTSE is expected to open 8 points higher, the CAC 3 points higher and the DAX 19 points higher.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.