- Gold price catches a bid gaining a few Dollars after flatlining for most of Wednesday.
- The next directional move will depend heavily on the outcome of Wednesday's FOMC.
- Gold Futures Open Interest is signaling a possible rebound to $2,000 on the cards, says analyst.
- Longer-term uptrend remains intact if bruised, according to technical analysis.
Gold price catches a bid and rises to the upper $1,940s in the run up to the FOMC meeting on Wednesday, as US Treasury yields back down from session highs. The recent banking crisis appears to have eased temporarily with the completion of the takeover of Credit Suisse by UBS. Markets may have drawn comfort from the news UBS may buy back the AT1 bonds that were sold as a sacrificial lamb to sweeten the takeover.
Despite Gold price’s sell-off over the last two days, the precious metal still remains very much in an uptrend on higher timeframes. Now, much depends on the outcome of the US Federal Reserve’s meeting as to whether the uptrend resumes or bears push Gold price a step lower.
Gold news: Market expectations of 25 bps rate hike firm
The outcome of the Federal Reserve meeting on Wednesday, March 22, at 18:00 GMT is likely to be a key determinant of where the Gold price goes next. The Fed sets the interest rate at which it lends to banks, at which banks lend to each other, and influences the rate at which they lend to consumers, and interest rates are a major factor impacting on the price of Gold. The higher the Fed sets interest rates the more investors earn simply by staying in cash or cash equivalents, making Gold a less-attractive-looking investment because it does not yield a return.
Markets currently expect the Federal Reserve to announce a hike of 25 bps or 0.25% of the Fed Funds Rate to a target range of 4.75%-5.00%, at the meeting. The probability of such a hike is currently set at 86% according to the CME FedWatch Tool, a highly regarded market gauge of future rate moves based on Fed Funds Futures. This is higher than the chances a few days ago at the height of the banking crisis when probabilities stood in the 60%s, but slightly lower than the 89% the gauge was showing earlier on Wednesday.
This FedWatch tool gives us an idea of market expectations heading into the event and leaves the chances of no hike whatsoever at an unlikely circa 14%.
According to experts, the Fed's longer term view as well as Fed Chairman Jerome Powell's press conference responses are also important.
“What statements the Fed makes in its communiqué tomorrow about its future monetary policy, and what Fed Chair Powell says in the subsequent press conference about the interest rate outlook, are likely to play a key role. If they manage to dampen rate cut expectations, Gold is likely to fall. Otherwise, another rise towards the $2,000 mark is on the cards," said economists at Commerzbank in a note on Gold.
If the Fed expects rates to peak this year with the possibility of a cut before year-end, markets may respond as if the decision was dovish. For the Gold price this will be a bullish result.
On the other hand, a 25 bps rate hike accompanied by a commitment to continue raising rates to a higher terminal rate will be interpreted as hawkish and weigh on the Gold price.
According to economists at TD Securities, there is a 20% probability of a hawkish outcome, a 55% probability of a "Base Case" outcome, and a 25% of the Fed taking a dovish line.
TD defines 'hawkish' as the Fed raising rates by 25 bps but "..separates ongoing liquidity strains in the banking system and its dual mandate of full-employment and on-target inflation," according to the note.
Base Case is defined as the "Fed delivers a 25 bps rate hike, acknowledging recent financial-market turmoil has raised uncertainty about the outlook."
Hawkish, TD defines as, "“Fed pauses rate increases, and flags rising uncertainty in the path forward for policy."
US Treasuries form a bullish reversal candlestick pattern
US Treasury bond yields are rising ahead of the meeting, with the yield on the 10-year Treasury bond at 3.62% at the time of writing. Yields have a high inverse correlation to the Gold price since they reflect interest rate expectations, which when rising tend to depress the value Gold because they increase the opportunity cost of holding Gold vis-a-vis staying in cash or cash equivalents.
From a technical perspective, the chart of the yield on the benchmark 10-year Treasury bond is in a short-term downtrend but with a possible bullish reversal pattern just having formed, after price formed a dragonfly doji candlestick on Monday, March 20. This was followed by a strong bullish green candle the day after, providing confirmation. It suggests the course of yields may be changing, although the FOMC will be a key event to provide a catalyst for the next move, whichever direction it is in.
US 10-year Treasury bond yield: Daily Chart
Gold Futures Open Interest suggests a rebound in Gold
Gold price is likely to rebound to the $2,000 level, according to FXStreet Senior Analyst and Editor, Pablo Piovano, based on an analysis of the Gold Futures market.
Tuesday March 21 marked the first day where traders scaled back their Futures positions following three consecutive days of increased open interest, the term used to describe the volume of open positions in the Futures market.
“Gold prices extended the negative start of the week and retreated to the $1,940 region on Tuesday. The strong downtick was on the back of shrinking open interest and volume and suggests that a potential rebound could be in the offing in the very near term,” said Piovano in a note on Wednesday morning.
Gold price technical analysis: Uptrend still intact, if bruised
Gold price recovers slightly to $1,948 at the time of writing after basing at the $1,940 level for most of the European Session on Wednesday. Whilst the precious metal looks vulnerable on the intraday charts a pan out to the daily chart, shows that the broader uptrend remains intact and there is every chance it could resume on the back of a more dovish takeaway from the FOMC meeting.
Gold price: Daily Chart
Whilst the declines over the past two days have been steep, they still don’t wipe out all the gains made on Monday when bank contagion fears peaked. This continues to suggest the downturn, though steep, may just be a correction before bulls resume their push higher. A move back up will likely retouch the $2,009 yearly highs before consolidating.
Nevertheless, Gold price has now broken out of its rising channel, which is a bearish development. The Relative Strength Index (RSI) momentum indicator has tracked price lower and is actually diverging when compared to where XAU/USD was when it last dipped. Nor are there any signs on the 4-hour chart of a bullish reversal forming, so in the very short-term the trend looks a little bearish.
More losses could result in a further decline to $1,930 first, and the level of the 50-4hr Simple Moving Average (SMA), and then, if really volatile, to the March 15 low at $1,885, which is just above support from the 50-day SMA.
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