Mixed signals are keeping gold rangebound

Ole Hansen

Head of Commodity Strategy

Gold has settled into a $40 range ahead of a near-certain sixth rate hike from the Federal Open Market Committee on March 21. A repeat post-FOMC rally depends on the forward guidance and whether economic data, as seen recently, continues to weaken relative to expectations. Opposite movements in real yields and the dollar during this quarter have also added to the current stalemate.

The probability of sixth rate hike in this cycle next week has been put at 100%. The key in order to determine the impact on gold will be the forward guidance, which could signal a change from three to four rate hikes in 2018. The latter is currently being priced with a 26% probability following a couple of months where expectations have been raised on a regular basis. 

Rate hikes

Source: Bloomberg

The five rate hikes seen so far in this current cycle all resulted in the same behaviour with gold selling off ahead only to rally strongly once the announcement was made. All of these hikes were characterized as being dovish hikes hence the potential impact this time round should Jerome Powell, the new Federal Reserve chair, strike a more hawkish note. 

Economic data have shown a weakening trend relative to expectations this year and this may accelerate should a global trade war erupt. 

An emerging divergence between the dollar and US 10-year real yields – not least against the Japanese yen – has been another reason for gold's recent lack of direction. With 10-year nominal bond yields approaching 3% and inflation expectations anchored around 2%, the real yields have seen a steady increase this year. Countering this move has been the renewed strength of the yen against the dollar. 

Markets data

A constant source of support for precious metals during the past year has been provided by President Trump and his often controversial twitter habits. Trump's behavior remains unpredictable with geopolitical risk indicators having increased since he took office. 

We maintain a bullish outlook for gold and it would take a break below $1,285/oz for that view to be altered. The last couple of weeks ahead US rate hikes have proven in the past to be a good buying opportunity. 
 
XAUUSD

You can access both of our platforms from a single Saxo account.

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)