Gold price pulls back from its yearly high as global banking jitters pass (for now) and US Treasury yields find a floor, supporting a stronger US Dollar. The precious metal trades at $1,961 at the time of writing. It has reached a crticial technical level at the base of a rising channel and is threatening to breakout lower, potentially bringing into question the continuity of the established uptrend, see the technical section below for more details.
Gold news: Safe-haven flows ease on banking rescue
The dust settles after the latest casualty of the current neo-financial crisis, Credit Suisse, was swallowed up by rival UBS on Monday, and Gold – the safe-haven par excellence – loses the upside momentum that propelled it to YTD highs above $2,000.
In the United States, treasury staff are looking at ways for regulators to insure more than the current Federal Deposit Insurance Cap (FDIC) of $250,000 for bank deposits, to increase confidence in the banking system, according to a report by Bloomberg News on Monday. This adds to all the support already provided by authorities, estimated at half the cost of the 2008 financial crisis bailout and provides further evidence to reassure investors that authorities are willing to step in to save the day.
US Dollar rallies before FOMC
The US Dollar is on the rise, reflected in the 0.20% gain seen in the US Dollar Index on the day, which tracks the world’s reserve currency against a basket of counterparts. Since Gold is priced in US Dollars, it tends to have an inverse relationship – when the Dollar strengthens it takes less of them to buy the same quantity of Gold, all other things being equal.
Highly correlated to the US Dollar are Treasury yields which are also up, rising from a nadir of 3.30% on Monday during the depths of the turmoil to 3.54% at the time of writing – for the benchmark 10-year US Treasury bond. Gold tends to fall when yields rise as they indicate rising interest rates and therfore a higher opportunity cost for investing Gold, which is non-yielding.
From a technical perspective the chart of the 10-year Treasury yield is also showing a long pin-like hammer candlestick formed yesterday, which looks very much like it is marking the end of the trend down that started as the March 2 highs rolled over. These sorts of candlesticks are quite rare and often denote a reversal of trend, and if that is the case this time it could signal the start of a short-term uptrend for yields.
The next big event for both Gold and the US Dollar is the FOMC meeting on Wednesday, March 22 at 18:00 GMT, at which the US Federal Reserve will make its next monetary policy decision. The odds currently favor a more-modest-than-was-previously-expected 0.25% increase in interest rates.
If the Fed decides to go big with a 0.50% rate hike, however, it will boost the Dollar and push down Gold price – no cut at all will have the opposite effect.
Making the decision a little more complicated this time, however, is the recent banking crisis which was triggered in part by rising interest rates. Whilst the Fed wants to battle inflation, it must now also take into consideration the impact of higher interest rates on financial stability.
Yohay Elam, Product Manager, Premium Offering at FXStreet, expects the Fed to map a hawkish course, at least intiially, prioritising price stability over financial stability.
“‘Nothing to see here, move along’ – that is how I expect the Federal Reserve to act in the wake of the banking crisis, raising rates to fight inflation as if the world hasn’t changed.” Says Elam in a preview of the meeting.
He notes the sudden ballooning of the Fed’s balance sheet over recent weeks since the banking crisis began and it stepped in to provide emergency liquidity to the US banking sector. This he argues is evidence that ‘easing by other means’ is ocurring, and suggests the Fed will feel justified in continuing with its aggresive rate hiking agenda.
Yet, he thinks Chariman Powell will temper the hawkish decision with a more nuanced press confernece speech, that will mean little if any net upside for the US Dollar overall.
“The short version of my scenario is: risk-off on the rate hike and the dot plot, followed by an immediate and slight recovery in response to the statement. Then, Powell would further boost the risk-on mood with promises to react to the situation and with caring words about the labor market.” Says Elam.
Gold price technical analysis: Pullback reaches channel line
From a technical perspective Gold price remains in an uptrend both on the short and medium timeframe, however, it has pulled back down to the base of its rising channel and now threatens to break out lower, something which would bring into doubt the short-term uptrend.
A decisive break and close below the lower channel line at $1,960 would signal a breakout to the downside with an eventual target equal to the width of the channel extrapolated lower, which would suggest a target at around $1,920. This also happens to be near the level of the 50-4hr Simple Moving Average (SMA), a level that is likely to provide a safety net for falling price.
The Relative Strength Index (RSI) is corroborating the bearish downturn in price action as it is falling in line with price. On the daily chart of Gold price, the RSI is about to exit the overbought region above 70 and if today ends relatively bearishly as looks likely, it will confirm an exit, providing a signal to go short.