Gold near key support as market mulls Fed hiking into recession Gold near key support as market mulls Fed hiking into recession Gold near key support as market mulls Fed hiking into recession

Gold near key support as market mulls Fed hiking into recession

Ole Hansen

Head of Commodity Strategy

Summary:  Gold and especially silver slumped on Tuesday after Fed Chair Powell said the Fed was prepared to increase the pace of rate hikes and to a higher-than-expected level should incoming data continued to show strength. Gold has despite the stronger dollar and rising rates risk managed to find support ahead of key support in the $1800 area, driven by the risk of either economic data turning softer or higher rates forcing a policy mistake leading to peak rates and recession, all events that may end up being supportive for gold and precious metals in general


Today's Saxo Market Call podcast
Today's Market Quick Take from the Saxo Strategy Team
Equity update: Powell turns hawkish - The calm before the storm?
Forex update: Powellb surprises hawkish, data still in driver's seat


Gold and especially silver slumped on Tuesday after Fed Chair Powell, in his prepared remarks to Congress, said the Fed was prepared to increase the pace of rate hikes and to a higher-than-expected level should incoming data continued to show strength. Terminal Fed rate expectations shifted higher to 5.66% with the market now pricing in a 60% risk of a 50 bp move at the March 22 meeting. 

Across market risk appetite tumbled, not least due to the dollar hitting a fresh high for the year,  with the selloff in metals being led by silver’s 4.6% slump to a four-month low near $20. Gold meanwhile has given back most of last week's bounce and following the failure to challenge resistance at $1864 and stay above the 21-day moving average, a development that otherwise would have signalled a return of positive momentum, the market is once again looking for support in the $1800 area ahead of $1775, the 200-day moving average.

Source: Saxo

During the Q&A session that followed his prepared statement, a tasty exchange between Powell and Sen. Elizabeth Warren (D) highlighted the risk the FOMC, not fully understanding their limitations in bringing inflation under control, will continue to hike rates until something brakes. The senator asked Powell what he would say to two million people losing their jobs if he keeps raising rates. To this he answered: “Will working people be better off if we just walk away from our jobs and inflation remains 5%-6%?”.

His comment further supported the view that the FOMC will hike faster, higher and for longer, with the obvious risk to the economic outlook and with that the eventual need to cut rates. We will continue to watch the dollar closely given its strong inverted correlation with gold, and now also increasingly how the market price the risk of a recession and with that the scale of the eventual drop in rates. We follow this through the size of the 2-10 year inversion of the US yield curve, currently at 107 basis points, and highest since 1981, and the one year spread between the September 2023 and September 2024 Fed funds futures. From a the current peak priced in around September the spread is looking for a +100 basis point drop the following twelve months. This is important given gold’s often powerful performance in the months that followed a Fed pause in rates.


In the short-term with Powell signalling an incredible data dependency, the focus now turns to incoming US data with the first being Friday’s job report. Given the level of elevated rate hike expectation currently priced in, any weakness in incoming data may now trigger a stronger positive response than otherwise called for. 

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)


Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.