• Commodities down
• QE3 on the table?
• All eyes on EU summit

Gold extended losses Thursday, completing the precious commodity’s third day in its longest downhill run for almost a month on the Fed’s decision to extend Operation Twist. Markets greeted the decision with disappointment after hoping for stronger easing measures to be put in place.

While bullion fell, the USD gained for the second consecutive day against a number of peers including the euro. The 17-nation currency lost ground on concern over the outcome of a Spanish banking audit and ongoing fears over the strength of euro zone growth were spurred on by weak PMI data from across the board.

“Gold’s rally up until mid-way through 2011 has been driven primarily by the Fed’s continued bouts of QE and so the lack of QE3 announced last night rather took the shine off the precious metal”, wrote Simon Denham (pictured) of Capital Spreads this morning. “With markets anticipating a more aggressive action from the Fed, and considering the Operation Twist increases maturity rather than the balance sheet itself investors found little reason to rush into gold.

“Meanwhile inflation numbers on both sides of the pond are falling so demand for the precious metal plunged.  As a result gold prices lost 13 bucks to 1604 and have now dipped below 1600 to 1597 this morning.”

Commodities down

Weak Chinese PMI data – along with the EU figures – has also served to supress investor appetite for other riskier commodities. Oil prices lingered around hit eight-month lows, losing 91 cents to US$80.54 a barrel after the Fed refused to engage in any heavy-handed easing measures. Gathering US crude stockpiles have also weighed on the price per barrel.

China's growth has been relied upon by the international community in recent years as global growth continues to falter in the face of a fracturing euro zone economy, with today’s downturn prone to causing widespread panic. "Poor PMI data continues to come out of Europe and China’s data was not up to expectations. I get the feeling the market is taking a page out of the British handbook – 'Keep Calm and Carry On' – but I don’t see how that will last," said John Curran, senior vice-president at CanadianForex.

"(The Canadian dollar) will maintain its underperformance on the crosses if economic data releases continue to track towards the weaker side of expectations." The commodity-linked Canadian dollar also took a bashing after the PMI from the world’s number two economy emerged.

QE3 on the table?

According to predictions from some of the world’s leading forex brokers, the possibility of further quantitative easing measures remains open. Erik Ristuben, chief investment officer Client Investment Strategies at Russell Investments, told CNBC earlier today: “I certainly think it’s on the table and most likely going to happen by September. The Fed made it clear earlier this year that the trigger for further action would be if they weren’t making any progress towards their mandate in employment, and their forecast suggests their mandate has been met already.”

According to a poll by Reurters conducted after the Fed’s announcement yesterday, 50 percent of economists feel that QE3 is a distinct possibility in the coming months. But, Ristuben added, “the pressure needs to be on policymakers in the euro zone to do the right thing.

“They [the Fed] recognise that these are fiscal issues for Europe. They need to be solved and addressed because any action that the Fed takes is not going to be effective in addressing the fundamental problems and we need the support of policymakers to resolve them.

Turning to charts, Ristuben suggested that what the market and the Fed may be telling investors are two separate things. “The market is telling us that the US is probably not going to go into recession without Europe going into catastrophic failure”, he said. “The market is also expecting that Europe will do what they need to do to address the problems.

“All eyes will be focussed on what happens at the EU summit next week.”

Sarah Cox. Markets Writer, ForexSpace.com