According to TD Securities, as the Federal Reserve remains a threat after the February inflation report, the gold market is likely to pull back and settle on a more stable level in the short term. Meanwhile, rising market optimism may weigh on gold in the near term, with a market analyst predicting a higher floor price.
“It is too early for an uninterrupted bull run underneath!”
According to Bart Melek, head of commodities at TD Securities, the gold market will lose its momentum once it settles at a stable technical level and will return some of its recent gains over the next week. Because the analyst says there is still a risk that the Fed will continue to support a hawkish stance. The February inflation report confirmed that price pressures were not falling fast enough. Therefore, markets will expect another 25 basis point rate hike at the Fed’s March 22 meeting. And that will happen despite the recent fallout in the banking industry. Melek makes the following assessment:
Given the high rate of inflation, it will be difficult for the US central bank to aggressively switch policy to a dovish stance right now. Especially given that financial system risk has decreased amid official statements that indicate a readiness to step back to stabilize the financial system.
cryptocoin.com As you follow, the latest US CPI data showed that prices excluding food and energy rose 0.5% month-on-month, marking the biggest increase in five months. Compared to a year ago, core CPI increased by 5.5%, largely in line with market expectations. Economists pay particular attention to the core CPI measure, as it excludes the volatile food and energy sectors. Melek adds that it is still too early for a ‘uninterrupted bull run’, given the macro situation.
“This rally is probably getting support from the short closing”
Gold’s rally to $1,930 on Wednesday following the collapse of Silicon Valley Bank has yet to stall. According to Melek, the combination of moderate wage data and financial system concerns has prompted markets to cut rates sharply along the treasury curve, pricing prices at a sharply lower final interest rate, accelerating expectations for a pivot, and higher credit risks. Melek also draws attention to the following:
This rally is bolstered by the closing of shorts, likely in response to the Fed Chairman’s latest hawkish rhetoric ahead of Friday’s payrolls.
Gold will trade above this level in the future.
But a pause in price action doesn’t mean gold won’t see another major rally this year. Especially now that the final Fed pivot looks more realistic. In this regard, Melek makes the following comment:
Currently higher interest rates and increased credit risk will likely slow the economy faster and lower rates along the curve towards 2023. Recent price movements suggest markets are focusing on the longer term, as Fed Funds are close to their peak and an earlier turnaround is possible. Time to maturity and when the trend towards a more dovish policy will occur and less worry about the eventual interest rate going up.
As markets focus on economic indicators such as inflation and wage growth to determine the Fed’s direction, TD Securities forecasts gold to trade above $1,925 later in the year. Melek adds that there is ‘a significant upside risk in the coming months’.
Analyst does not expect gold price to hold $1,900
The US government’s commitment to ensure depositors’ money is safe in bankrupt regional banks seems to allay fears of a major banking crisis. While increasing market optimism may weigh on gold in the near term, one market analyst says he sees a higher floor price.
Bernard Dahdah, precious metals analyst at Natixis, said in a research note that he does not expect gold prices to hold $1,900 as government action on California’s Silicon Valley Bank and New York’s Signature Bank eased contagion fears and a broader banking crisis. Dahdah’s short-term outlook came as gold prices tested support just above $1,900 on Tuesday.
Natixis raises gold forecasts
While the risks are decreasing, Dahdah says that the risks have not completely disappeared and they will support gold at a higher price. Natixis raised its average gold price forecast to $1,830 from its initial 2023 forecast of $1,790. Dahdah notes that the Fed’s monetary policy stance remains the most important factor for gold. He notes that the potential for a greater banking crisis could keep the US central bank from raising interest rates aggressively this year.
However, the Federal Reserve will walk a fine line between protecting the economy and cooling inflation. On Tuesday, the U.S. Department of Labor said its Consumer Price Index saw an annual increase of 6.0% in February. At the same time, core inflation rose 5.5% for the year, well above the central bank’s 2% target.
According to the CME FedWatch tool, markets see an 82% probability that the Federal Reserve will raise interest rates by 25 basis points on March 22. The probability that the central bank will not change rates is increasing. Expectations have changed significantly from last week, when markets saw about an 80% chance for a 50 basis point rate hike. Looking further, markets are starting to price out a possible rate cut at the end of the summer.
