Trader thoughts - eyeing a defining and bullish set-up in Gold

The UK100 is on fire, having the biggest move on the day, where the rising rates environment has seen the FTSE100 as one of the go-to value plays, given its higher weighting towards financials, energy, and mining.

We eye the 2020 Jan highs in the UK100 here, and that may well prove to be heavy going – another way to play this is long/short, so see the ratio of the UK100 and GER40 (I’ve hedged the GER40 exposure to GBP) which cleanly shows the outperformance.

Energy remains a core theme, with SpotCrude now just a whisker from the Oct 2021 highs – for momentum traders this is a big set-up as we home in on a test of $85.50/$86.00 – certainly on the daily and given price is holding above all short-term moving averages there are few reasons to be short, other than we’re approaching a significant supply zone, which could offer challenges for longs. A close through $86 and the science of break-out trading comes into its own and while we may need to see new news – be it economic improvements, reduced inventories – if this starts to bull trend following a breakout, then one would do well to follow the capital.

In FX markets the USD is unmoved, which won’t surprise with US cash Treasuries closed, although we have seen selling in US rates and Treasury futures. The outperformance has come from the NOK and CAD, which again loops into a higher crude price. The CAD looks interesting from a fundamental stance with the 26 Jan BoC meeting looming large and the market placing a 70% chance of a hike here – tomorrows CAD CPI print could alter that pricing with the market eyeing this to increase 4.8% YoY (-0.1% MoM) – Good numbers put CADJPY back on the cards for a breakout above 91.70.

EURGBP daily chart

(Source: TradingVIew - Past performance is not indicative of future performance.)

Eyes on GBP exposures seems prudent as we head to UK jobs data at 6:00pm AEDT – GBPUSD is starting to attract better selling interest from clients, with 68% of open positions positioned for downside. UK rates markets are pricing in an 89% chance of a hike on 3 February, with some 104bp of hikes priced this year – again these expectations seem full. UK real rates have become aggressively less negative and that has boosted the GBP, but with the market positioned long of GBP positioning - especially in options – it feels like we could be ready to see a turn.

I have a focus on EURGBP – partly because it feels as though it's trying to put in a bottom, with short-term EMAs about to cross. But also because both UK and EUR rates have become rich (the market is pricing 13bp of hikes in Europe this year) – I still think if the ECB turn more hawkish that could set off a EUR short covering run which could see EURGBP bull trend, at least for a short period.

Gold (XAUUSD) weekly chart

(Source: TradingVIew - Past performance is not indicative of future performance.)

Finally, last but certainly not least Gold – XAUUSD. In a world having started to ramp up short positions in US Treasuries and tighter policy, it’s amazing to see how Gold has held up as rate hikes are priced into G10 markets – personally, in a world where markets feel we get 4 hikes from the Fed and QT, I see Gold as a stand out portfolio diversifier – the moment (and that’s an if) the market senses its rate pricing is incorrect – perhaps we get a shock or slower growth – then Gold should break out and bull trend. Patience may be required.