Unfortunately, there are no simple answers to these questions. Ask a gold bull or an average Joe and they will say that the gold is going to go up as the economy is tumbling and the paper money is worthless, while the gold has always been a real measure of value. Ask a dollar bull or a gold pessimist and they will say that the commodity has no future as the economy is going to recover soon, that the inflation is nonexistent and the gold is useless as a commodity. But today I’ll try to look at gold from the technical point of view.

The chart below shows the daily chart of the spot gold from August 2009 until now. It includes the head-and-shoulders pattern that has started forming since October 6 and has ended its formation on January 20, 2010. The ”shoulders” are marked with the letter “S” and the head is marked with letter “H”. The neckline is sloped because this “head-and-shoulders” pattern is bullish. The pattern broke out down on January 21. The gold continued to form a sloped resistance line, which now contains three price spikes. The probable target for this pattern breakout lies at the basement of the first shoulder:

The key level on the chart is the pattern breakout target that is located at $1,023/ounce. That lne can be reached during the next 7 weeks even if the gold is going to continue retracing to the resistance slope from time to time.

From the technical point of view this is a perfect pattern breakout, but what does a retracement to ~$1,023 means for gold in a long-term perspective? Is it a bubble burst? Definitely not. Of course, it may serve as a first step in a serious trend change or even may end in a steep drop to some years’ lows, but the pattern itself doesn’t mean a lot in a long-term perspective. I suggest watching closely for what happens next after the pattern is played out and the new technical data becomes available.
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Read the rest of Forex Technical Analysis for 02/08—02/12 Week (14 words)

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Unemployment rate fell to 9.7 in January from a previous reading of 10.0 one month before.

Nonfarm payrolls were at -20k in January from a previous revised reading of -150k. Forecasts were more optimistic expecting an increase of 15k jobs, but even if actual data didn’t confirm the analyst’s opinion, a significant improvement could be perceived.

Consumer credit was the last USD report this week and improved significantly from the last reading, but still declined $1.7 billion from a previous revised decline of $21.8 billion. Forecasts were expecting grimmer figures, betting on a decline of $9.2 billion.
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ISM PMI Index advanced to 55.9 in December from a previous reading of 53.6 in November and above forecasts which expected this index to be at 54.1 for the past month.

Total construction spending posted a slight decline of -0.6% in November from a previous revised reading of -0.5% in October. Forecasts expected a less impacting decline at -0.4%.

Initial jobless claims published last week surprised traders positively at 432k from a previous revised reading of 454k, and a lower, therefore more positive actual figures than forecasts which suggested an increase to 460k for this report.
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For the year of 2010, I continue my forecast tradition and will present not only Forex forecast, but also my projections about gold, oil and interest rates for the year to come. You can also see what the readers of this blog expect from 2010 and you also can offer your vision of 2010 global economy in my forecast poll (voting is open until January 15th).

EUR/USD is ending 2009 in a long-term uptrend but the behavior of the pair in 2010 will be determined by the interest rate decisions of the Fed and ECB. In the bearish scenario we might see a consolidation of EUR/USD between 1.16 and 1.37. A bullish scenario is less probable, in my opinion, but can lead to the growth of the currency pair to 1.65–1.70 levels.

GBP/USD is hard to predict, but the weakness of the economy of U.K. will be doing its cause and we might see a return to 1.36–1.47 range in 2010. A bullish scenario is possible only if the pair is capable of breaking the resistance level formed near 1.68.

USD/JPY ends 2009 in a strong bearish trend, but the controversy is in the dissatisfaction of the Japanese authorities with the strong yen, which hurts their exports. I am quite sure that USD/JPY will be artificially held above 80.00 level, which at some point may generate a carry trade uptrend with the targets near 100.00 or 110.00.

EUR/JPY is consolidating in a rather tight range that may break either up — to near 160, or down — to 110–120.

Oil may become even less important commodity (from the investor’s point of view) in 2010, which will reduce the speculative part in its price, helping it to trade more stably. A broad range between $60-$90 looks to be comfortable both for producers and consumers during the global economy’s moderate growth.

Gold is a hype. In 2010 it still can continue to be a hype, but the recently started correction may hit some huge hedge funds’ stop-losses and then we’ll see $600-$800 per ounce. In case of the continuation of the gold’s crazy rally, I see $1,500 like a rather conservative target for the next year.

Interest rates:

Almost everyone expects some rate hikes from the Federal Reserve starting from June 2010. That looks like a probable scenario, but the housing market is still in a deep pit in the United States. In my opinion, the regulator may decide to postpone the rate increases until September. Anyway, we can end this year with 1%-1.5% federal funds rate.

ECB is usually faster on rate increases as the inflation is its main concern, but the rate for the main refinancing operations may continue to be at 1% for a rather long period of 2010 with the support of the manufacturing lobby from France and Germany. 2% looks to be a probable end-of-the-year value for the Eurozone’s interest rate.

The Bank of England has its current bank rate at a historical minimum of 0.5% and this can’t continue for too long. The financial system of the Great Britain strongly depends on selling the bonds that, to be attractive for the investors, require a lot higher interest rates. BoE may show quite fast rate hike streak, ending the year 2010 close to 3%.

The Bank of Japan has no reason and no excuse to raise the country’s interest rates. The current 0.1% may still look adequate enough even in December 2010.
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