GOLD PRICE, ANALYSIS AND CHARTS:
FUNDAMENTAL FORECAST FOR GOLD PRICE: NEUTRAL
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MOST READ: ECB Delivers 50bps Hike Despite Banking Sector Woes, EURUSD Indecisive
GOLD WEEK IN REVIEW
Gold has enjoyed a stellar week as ever-changing risk sentiment reignited the precious metals safe have appeal. Over the last 18 months or so the US Dollar has become the go to safe haven asset among market participants with a lot of this down to the rising interest rate environment out of the US. Compare this to the non-yielding precious metal and one can understand the appeal of the US Dollar as the world’s premier currency coupled with rising interest on dollar savings.
This week’s turmoil in the financial sector brought about renewed interest in Gold as the dollar declined and so did the rate hike expectations for the US Federal Reserve. We have seen the Federal Funds Peak Rate expectations decline from around a high of 5.8% 10 days ago down to 4.7% (at the time of writing). Obviously much has been made this week about the US Banking sector following the SVB and Silvergate failures (which were the 2nd and 3rd largest Bank failures in US history) and whether we will see any contagion as a result. We did see some of that fear spillover as on Wednesday Credit Suisse came under pressure in Europe before the Swiss National Bank (SNB) stepped in to provide aid to the long-embattled bank.
This was followed by news that major US Banks including CitiBank and JPMorgan were going to offer First Republic Bank in the US a lifeline. US Banks haveborrowed nearly $165 billion from the Federal Reserve over the last week in a sign of how much stress is in the system as the Fed instituted an emergency funding programme. First Republic however continued its decline on Friday reigniting recession fears as this was felt across the board with drops for risk assets, the SP500 down 1.1% on Friday led lower by drops in First Republic and other Banks. Judging by Fridays late moves for risk assets recessionary fears. US Treasury yields sank in part on such fears giving a Gold a boost as prices rallied nearly $60 to within a whisker of the $2000 mark. We also saw easing inflation expectations and falling confidence among U.S. households as we approach the FOMC meeting in the week ahead.
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THE FOMC MEETING AND US DATA IN THE WEEK AHEAD
The recent developments in the Banking sector have seen analysts rush to emphasize the fact that Banks are in a much better place than the 2007-08 financial crisis. The troubles have however reignited recessionary fears as problems for Banks could lead to tightening regulations and problems for smaller and mid-sized companies getting the loans they need to grow.
The FOMC meeting this week has become a lot more interesting however, the ECB decision to hike rates by 50bps this past week was a clear sign that price stability trumps financial stability. The question is will the Federal Reserve follow suit…?
The Fed is ahead of the ECB in its hiking cycle which means that it does not necessarily have to raise rates by 50bps this week. Couple that with the fact that inflation has slowed and retreated faster in the US than it has in the Euro Area. Markets were resigned to a 50bps hike just two weeks ago following Fed Chair Powell’s testimony before the US congress where he even discussed the possibility of raising rates faster if needed. What a difference two weeks can make in financial markets.
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The Fed is facing a tough call particularly given Fridays US session which was a sign that overall fears around the Banking sector haven’t completely disappeared. I do think however that given the ECB’s decision the Fed is likely to deliver a 25bps hike on Wednesday as inflation may have cooled but remains uncomfortably high. Let’s take a quick look at the Fed rate hike probabilities and the way they have changed over the past month.
Source: CME FedWatch Tool
US ECONOMIC CALENDAR FOR THE WEEK AHEAD
The week ahead on the calendar is still busy out of the US with two ‘high’ rated data releases, and a host of ‘medium’ rated data releases.
Here are the two high ‘rated’ risk events for the week ahead on the economic calendar:
- On Wednesday, March 22, we have the FOMC Interest rate decision and Economic Projections due at 18h00 GMT.
- On Wednesday, March 22, we also have the FOMC Press Conference due at 18h30 GMT.
- On Friday, December 24, we have Durable Goods Orders (MoM) at 12h30 GMT.
For all market-moving economic releases and events, see the DailyFX Calendar
GOLD (XAU/USD) TECHNICALS AND FINAL THOUGHTS
Technically Gold has now broken above the previous YTD high with eyes now on the key psychological level around the $2000 handle. A break higher here will no doubt bring the 2022 high into focus around $2069 and the pandemic high slightly higher at the $2074 handle. This would be uncharted territory for technical analysis as the precious metal hasn’t spent a great deal of time above the $2000 handle, while the pandemic high of $2074 is the all-time high price for Gold. The RSI is however in overbought territory at present which may offer some to bears, coupled with the fact that Gold currently trades quite a distance away from the 50, 100 and 200-day MAs. A retracement appears on the cards but will rest on overall market sentiment.
Potential scenarios for gold rest on the nature of the FOMC decision next week but even more so on the prevailing sentiment regarding the financial sector. This was evident in the week gone buy and particularly Friday as any fear could lead to safe haven demand, this could push gold to potentially print a new all-time. A 25bps hike from the Fed should do little to gold prices this and it surprises me to make such a statement. However, give the dynamics at play and what we saw from Gold over the last 10 days, it’s clear a return of haven appeal given the recent angst in the Banking sector remains the biggest driver of gold prices at the moment.
Gold Daily Chart, March 17, 2022
Source: TradingView, Prepared by Zain Vawda
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— Written by Zain Vawda for DailyFX.com
Contact and follow Zain on Twitter: @zvawda