XAU/USD virtually unchanged ahead of key US data, US Dollar vulnerable long term
- Gold price continues lazily flatlining as markets debate the future of interest rates.
- Jerome Powell said privately the Federal Reserve expects one more rate hike this year but markets disagree.
- US Dollar suffers negative outlook versus major peers as Fed handcuffed by banking crisis – XAU/USD positive.
Gold price continues its comatose flatline in the $1,950s-60s in the early European session on Thursday. This comes in spite of the news that Federal Reserve Chairman Jerome Powell admitted privately that the Fed still sees one more rate hike this year. A market-based gauge of future rate hikes, however, is barely unchanged from the day before, and still shows odds favoring the Fed doing nothing in May.
Powell privately believes in one more hike but markets pass-on-by
Republican Representative Kevin Hern reported to Bloomberg that Jerome Powell admitted he still sees one more rate hike, when he was in a private meeting with US lawmakers on how much further the central bank will raise interest rates this year.
Despite the revelation, the Fed Funds Futures Curve, a market-based gauge of what the Fed will do at future meetings, has only increased the chances of rate hike in May to 45% from 43% previously. The same gauge sees odds favoring the Fed not hiking rates at all, with a 55% probability of such an outcome at the May FOMC meeting.
Higher rates are negative for XAU/USD as they increase the opportunity cost of holding Gold vis-a-vis staying in cash or cash alternatives.
Fundamentals undermine US Dollar outlook, support Gold price
XAU/USD may be impacted by US data out on Thursday. Initial Jobless Claims is scheduled for release at 12:30 GMT and forecast to show a 196K rise from 191K in the previous week. The data could impact expectations of future policy moves by the Federal Reserve given its mandate to ensure full employment. A significantly higher-than-expected result will suggest the possibility of weakness in the labour market and encourage the Fed to keep rates unchanged. A lower-than-expected result will indicate the labour market is still strong and encourage the Fed to continue raising rates to combat inflation.
Gross Domestic Product Annualized (Q4) will provide a perspective on general economic growth that could also effect Fed rate hike expectations, the US Dollar and Gold price. Economists expect the result to remain unchanged at 2.7% but a substantially higher-than-expected reading will suggest growth is strong and increase bets the Fed will continue raising rates to combat higher prices. This will have the effect of strengthening the US Dollar and weighing on XAU/USD. The opposite effect is expected if the result is lower than expected.
More importantly for Gold price, the Fed’s prefered gauge of inflation, the US Core Personal Expenditures – Price Index (PCE) for February is scheduled for release on Friday at 12:30 GMT. Economists expect the key Core PCE to decline to 0.4% from 0.6% previously, MoM, and to remain unchanged at 4.7% YoY. A substantially higher-than-expected result could prompt the Fed to raise rates more aggressively negatively impacting XAU/USD, and vice-versa for a lower-than-expected result.
Besides the impact of impending data releases, the US Dollar is suffering from an overall negative outlook compared to its main counterparts, especially the Euro. This could result in losses for the US Dollar Index (DXY) which tracks the value of the currency against a weighted basket of counterparts. Such a deadline would provide a bullish catalyst for XAU/USD.
In the case of the Euro, the US Dollar may decline due to a possible closing of the interest rate differential between the currencies, which hitherto has favored the Greenback. Currencies with higher rates gain an advantage via the effect of the carry trade in which investors profit by borrowing currencies in a low interest rate jurisdiction and using the money to buy a currency yielding a higher rate of return.
The gap is likely to close because the Federal Reserve (Fed) is widely seen as reaching the end of its hiking cycle, whilst the European Central Bank (ECB) is still viewed as being at the start of its cycle.
The Fed is also seen as more limited in how much higher it can raise rates compared to the ECB due to the different effects higher rates have on the two region’s banking systems.
According to Andrew Stimpson, KBW Head of European Banks Research, Europeans are much less likely to withdraw their bank deposits and invest them in higher yielding money market funds – the root cause of the US banking crisis.
“In Europe we haven’t got the same ease to switch into a money market fund, that is not a normal product that the general population will think of,” said Stimpson in an interview with Bloomberg News.
“The absolute level of rates in Europe is also lower than in the US, so if you are going to sit down on a Sunday afternoon and sort out your finances, whether you are going to switch from an overnight rate of zero to a timed deposit of 1.6-1.7% it is probably not going to make much difference to you,” Stimpson added.
Other major currencies, including the Pound Sterling and the Yen may also strengthen versus the US Dollar. UK Core CPI recently rose to a relatively high 6.2% in February suggesting there will be more pressure on the Bank of England (BOE) to hike rates, with the effect of boosting the Pound.
In Japan, meanwhile, a monetary policy pivot is widely expected after the inauguration of a new governor for the Bank of Japan Ueda Kazuo and on the back of rising inflation. If the BOJ tightens policy after years of ultra-loose policy it could have a dramatic effect on the Yen. Japanese investors have bought an estimated $3.4 trillion of foriegn assets during decades of extremely low interest rates in Japan, seeking yield overseas due to a dearth of options at home. This outflow of capital threatens to tsunami back if rates in Japan begin to rise, substantially increasing demand for the Yen, according to a recent report by Bloomberg News.
Gold price bullish trend despite lack of direction in short term
XAU/USD may be snailing along little-changed in the short term, but it is still in an uptrend when looked at from a distance, adopting a medium-term perspective. The price of the precious metal continues to make higher highs and lows on the daily chart that show an uptrend is in play. Thus, according to the market maxim, “The trend is your friend until the bend at the end,” the technical outlook favors bulls.
Gold price: Daily Chart
A break above the key $2,009 March top would provide confirmation of further upside. The next target for Gold price would then lie at the $2,070 March 2022 highs.
The key $1,934 March 22 swing low must hold for Gold bulls to retain the advantage. Yet, a break and close on a daily basis below that level would introduce doubt into the overall bullish assessment of the trend. Such a move would probably see a sharp decline to support at $1,990 supplied by the 50-day Simple Moving Average (SMA).
There is a suggestion Gold price may be forming a triangle pattern as it oscillates to-and-fro between a limited range, and a closer inspection of the pattern on lower timeframes may offer traders opportunities to enter breakout trades at more daring levels than the broader range parameters highlighted above.
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