By Jigar Trivedi
Comex Gold firmed up around $1,930 an ounce on Friday registered third straight weekly advance, as the global banking turmoil that started in the US stoked fears of a broader weakness in the world economy, driving investors to hedge with the safe-haven metal. Expectations that major central banks would soften their stance on inflation in order to avoid a severe recession also supported gold prices. Meanwhile, the European Central Bank raised its policy rate by 50 basis points on Thursday despite the vulnerability of some European lenders, saying higher rates could improve bank margins. Investors now look ahead to the Federal Reserve’s policy decision next week, where it is expected to deliver a more moderate 25 basis point rate increase in light of easing inflationary pressures and the recent banking turmoil. Gold is highly sensitive to the rates outlook as higher interest rates lift the opportunity cost of holding non-yielding bullion and vice versa.
Dollar eases as haven demand ebbs
The dollar index eased toward 104, sliding for the second straight session as a rescue package for First Republic Bank eased market concerns about another bank failure in the US, lifting market sentiment while hurting demand for safe-haven currencies. Large US banks agreed to contribute $30 billion in deposits to First Republic Bank in a bid to shore up confidence in the banking system. Equities and risk-sensitive currencies rallied on the news, putting downward pressure on the dollar. The currency also weakened after the European Central Bank raised interest rates by 50 basis points despite the vulnerability of some European banks. All eyes will be closely monitoring the US Fed policy and the Fed’s projections to gauge the 2023 rate cycle.
ECB hikes rates to fresh 14-year high
The ECB raised interest rates by 50 bps as expected, further pushing borrowing costs to the highest level since late 2008, in order to help temper the region’s stubbornly high inflation. Policymakers also said the euro area banking sector was resilient, with strong capital and liquidity positions, and that they were monitoring current market tensions closely, while they stood ready to respond as necessary to preserve price stability and maintain financial stability in the region. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility were all increased to 3.50%, 3.75% and 3.00%, respectively.
US Treasury yields retreat further
The yield on the US 10-year Treasury note fell to the 3.4% mark in mid-March, the lowest in six weeks, as persistent concerns regarding the stability of the global financial sector ramped up demand for the safety of US government debt. The potential sale of the First Republic Bank extended the risk of a crisis in the banking sector after the collapse of Signature Bank and SVB. To add, the Swiss National Bank’s liquidity support for Credit Suisse offered a little relief for systemic risks to European lenders but failed to prevent a fresh flight to safety in US bonds.
Outlook
The upcoming week is going to be crucial for the yellow metal traders. On Tuesday US will release existing home sales for February. Most importantly, Wednesday the Fed will come out with the monetary policy along with the dot chart & Summary of Economic Projections. The Bank of England will release its monetary policy on Thursday. US will release new home sales on Thursday. Finally on Friday, US will release core durable goods orders and manufacturing PMI for march hence the week will be very much volatile. Moreover, the banking crisis has been taken care of by the respective central banks of the region but the market will continue to monitor the developments in the same matter. The dollar has a stiff resistance near 106 levels and 103.5 is a floor for now. Likewise, the Comex gold has a strong support near $1910 an ounce and in case of a strong up move, $1,970 an ounce is a cap. The outlook is bullish for the week.
(Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities. Views expressed are author’s own. Please consult your financial advisor before investing.)