Gold prices at critical juncture, eyes on technical downside targets and Central Banks

• Gold prices have started to form a top at $1,326 YTD highs.
• The question is whether the Fed is dovish or neutral and how much divergence is left between the Fed and other global banks as well as the US economy and its competitors. 
• Is the gloomy economic mood shifting when considering US data?

Gold prices have captured the market's attention at the start of this week, extending the correction lows of last week while a number of factors playing out in the price action today. 

• US: Total nonfarm payroll employment increased by 304K in January vs 165K expected

Firstly, the US dollar has turned well bid. The greenback has near enough retraced all of the Fed sell-off as investors figure that the US economy still stands in a better place, ahead of the game regarding recovery as a result of its fiscal and monetary policy, reflecting corporate tax reform deregulation and the Fed. While the Fed has hinted at a pause at its rate hike cycle, the market may have got somewhat carried away in offloading the dollar, and that is now being reflected back into the price and US stocks which have experienced their best start to a January for decades. 

Analysts at TD Securities explained that precious metals are seeing some macro profit-taking after the FOMC boost, as US economic data has remained fairly robust:

"The dovish shift and slowing global economy should keep prices well supported, but with the market currently pricing in cuts, any signs of continued US data strength will ultimately keep a cap on the further precious metal upside."

Central bank risks

This week we will hear from the BoE and the RBA which could well underpin the notion that a divergence remains between the Fed and other central banks, especially should these banks decide to take their cues from the Fed, BoC and ECB that have all dialled back their hawkish monetary policy stance.  Such an outcome would likely underpin the upside bias in the dollar, US rates and weigh on the bull's case for higher prices in the near term.

• WTI sell-off bottomed at crucial technical confluence area, destined for $60 on bullish fundamentals

Gold levels

Gold prices have declined today to 1308 and a dollar shy of the 38.2% Fibo retracement of the 23rd Jan incline to 1326 recent tops and the confluence of S3. The move was overdone and exceeded the ATR. We have seen a reversion back to 38.2% of the decline from the tops and of the same of today's sell-off. A close below the prior day's close of 1316 would be bearish and supporting the prospects of an interim top and potential reversal of the late Jan double bottoms down at 1276. A break of 1307 opens the 50% retracement at 1301 as a level to target guarding the 1297 9th Jan highs.