After gold rose 2% last Friday and broke through the resistance level of $1,865, at the beginning of the week, London gold hit a five-week high, while the market sentiment was risk appetite. US authorities announced plans to limit the fallout from the collapse of Silicon Valley Bank (SVB). At press time, gold was trading at $1,878.84, trading in the low $1,867.03 to $1,894.68 range.
US Treasury (Treasury) and the Federal Reserve (fed) issued a joint statement, announced a series of measures to stabilize the banking system, and said Silicon Valley Bank depositors will start withdrawing deposits from Monday. The Biden administration assured on Sunday that bankrupt Silicon Valley Bank customers would have access to all their funds starting Monday. Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and FDIC Chairman Martin J. Grunberg said in a joint statement on Sunday that the FDIC will protect clients'assets of Silicon Valley Bank and Signature Bank.
Investors are speculating that the Fed is now less inclined to raise rates aggressively by 50 basis points this month, which will lead to a weaker dollar. Fed funds futures surged in early trade, implying only a 17 percent chance of a 50 basis point rate hike, compared with around 70 percent before last week's announcement of Silicon Valley Bank's bankruptcy. Last Wednesday, the peak interest rate fell from 5.69% to 5.14%, and the market even expected a rate cut by the end of this year. The two-year U.S. Treasury yield fell to 4.445%, well off last week's high of 5.08%, a move that favored gold.
A broad fall in the dollar added to gains in the precious metal as U.S. regulators struggled to contain the financial crisis, but failed to spark a rebound in U.S. bond yields. Fears that the Fed's rate hikes will make the U.S. banking sector more vulnerable enough to trigger a recession weigh on fears of a Fed rate hike, despite stronger U.S. data and Fed Chairman Jerome Powell's upbeat testimony.
It should be noted, however, that Asia-Pacific equities were unable to cheer the dollar's weakness, which despite recent gains, along with concerns over fresh tensions between the U.S. and China, drove gold prices higher.
Additionally, cautious sentiment ahead of this week's U.S. consumer price index (CPI) and a notable drop in the greenback amid a better-than-expected February jobs report also challenged gold/dollar bulls. Even if the financial system is under stress, the Fed could take more aggressive steps if economic data is strong.
Analysts at TD Securities explained: "Core inflation is likely to gain momentum in February, with inflation expected to rise by 0.5% on month, as we look for the recent sharp easing of commodity deflation to begin to normalize. Housing inflation is likely to remain the main downside. Certainty factors, while a slowdown in petrol and food prices could dampen non-core inflation. Our monthly inflation forecasts imply headline/core price increases of 6.1%/5.5% y/y respectively.”
Spot Gold Technical Analysis
Gold prices have produced a decisive breakout as the precious metal managed to break above the confluence of resistance at the 38.2% retracement of the one-month band at $1865, which has now turned into support.
It then broke above the moderately bullish 50-day moving average (DMA) of $1,873, extending Friday's advance to a six-week high of $1,895.
Gold bulls need to take down the intraday high of $1,895 to resume the uptrend and test resistance at $1,900.
It should be noted that the 61.8% retracement of the one-month band acts as additional upside resistance near $1,902.
The 4-hour chart shows that if gold fails to extend its bullish consolidation towards $1,920, bears may step in at this juncture, pointing to trendline support.
A pullback in XAU/USD could retest the previous resistance-turned-support 50-day moving average at $1,873, below which daily lows at $1,868 could come into play.
Conversely, a break below the resistance-turned-support level at $1,865 would require confirmation from $1,857, including the 23.6% retracement of the one-week band, to wake up gold bears.
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