Banking crisis worries fade, dollar recovers ahead of FOMC meeting, gold retreats from year-to-date highs

2023-03-21 17:16:52

The price of gold hit another yearly high on Monday, breaking the $2,000 mark for the third time in history; the last time gold broke through $2,000 was during the COVID-19 pandemic.

This strong bull market in gold prices began around the low of $1,800 in March this year, and gold prices have not rebounded since then. The price of gold has a strong negative correlation with the yield of U.S. Treasury bonds, and the yield of U.S. Treasury bonds fell significantly in March.

Global banking turmoil has forced investors to reconsider their outlook for soaring borrowing costs. The market remained in this uncertain environment, with investors choosing to buy U.S. Treasury bonds for safety, causing bond yields to fall. Some analysts believe that U.S. Treasury yields may have peaked. There may be two driving factors behind the accelerated surge in gold prices: gold has an obvious hedging role in adversity and U.S. bond yields have fallen.

An improvement in risk appetite should see gains across the sector, according to strategists at ANZ Bank. This is not expected to prevent further inflows into gold. The uncertain macro backdrop continued to attract buying despite banking regulators rushing to shore up sentiment. All eyes now turn to the Fed's two-day meeting. Any dovish comments should help support the precious metals sector.

Gold prices retreated from year-to-date highs on Tuesday as jitters in the global banking sector passed (for now) and U.S. Treasury yields found a floor, supporting a stronger dollar. At the time of writing, the precious metal is trading at $1964.87 as it continues to consolidate within a technical uptrend.

Gold - the preeminent safe-haven asset - lost the momentum that propelled it to yearly highs above $2,000 an ounce after the latest casualty of the current new financial crisis, Credit Suisse, was swallowed by rival UBS on Monday. upward momentum.

In the U.S., Treasury Department staff are looking at ways to get regulators to insure bank deposits above the current Federal Deposit Insurance (FDIC) cap of $250,000 to boost confidence in the banking system, Bloomberg News reported Monday. That provided further evidence to reassure investors that authorities were willing to step in to the rescue.

The greenback is gaining ground, reflected in a 0.20% gain on the day in the U.S. dollar index , which tracks the worlds reserve currency against a basket of its peers. Since gold is priced in dollars, they tend to be inversely related - when the dollar is stronger, fewer dollars are needed to buy the same amount of gold, all else being equal.

For gold and the dollar, the next big event is the FOMC meeting at 18:00 Beijing time on Wednesday, March 22, at which the US Federal Reserve will make its next monetary policy decision. Bets are now leaning towards a more modest 0.25% hike than previously expected.

However, if the Fed decides to aggressively raise rates by 0.50%, this will boost the dollar and push gold lower - not cutting rates at all would have the opposite effect.

Complicating the decision this time, however, is the recent banking crisis, triggered in part by rising interest rates. While the Fed wants to fight inflation, it must now also consider the financial stability implications of higher interest rates.

Another factor to consider is what the Governing Council expects the final rate to be, as reflected in the dot plot in its summary of economic forecasts.

Although gold prices are currently hovering below the $2,000 mark, it is too early to assert that gold prices have peaked. The CME FedWatch tool shows that the market expects a 26.2% chance that the Fed will keep policy unchanged at the end of its March 21-22 meeting, and about a 75% chance of raising interest rates by 25 basis points.

The Fed is unlikely to abruptly end its current rate hike cycle. However, one should not forget that the Fed has adjusted policy in the middle of policy cycles in the past. Given that most central bank rate hike cycles are nearing their peak, it is not out of the question for the Fed to signal the end of the cycle.

In addition, the US inflation rate is still higher than the Fed's inflation target of 2%, so it is too early to judge that the Fed will pause or end the rate hike cycle.

Gold Technical Analysis

From a technical standpoint, gold prices remain in an uptrend on short- and medium-term time frames. It rose in a steep channel but now appears to be backing off after peaking on Monday.

The average directional indicator (ADX) on the 4-hour chart is 55, which is a very high reading.

Given that the high reading was accompanied by a reversal pattern of two negative candlesticks from Monday's high, and a steady decline since then, this could be a sign that gold prices may retrace further, possibly to the $1960 area at the bottom of the channel.

However, the overall trend is bullish, suggesting that it could continue to rise once it completes its correction. It may take a decisive breakout and close below the lower channel band to signal a deeper correction or uptrend reversal is underway.

A foothold for gold prices above the $2,000 mark is crucial to maintaining the recent bullish momentum.

The next upside target for gold buyers is the yearly high of $2,010.

Looking further up, all eyes will be on the 2022 high of $2071 and the all-time high of $2075.

Conversely, a pullback in gold prices may initially find buyers around the round-figure mark of $1,970.

A break below that level would see the previous day's low of $1,966 be tested.

Gold sellers will then challenge the February high of $1,960, which could be a difficult support to break.


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