Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Thoughts on gold ahead of FOMC
Ole Hansen
Head of Commodity Strategy
Summary: Gold has so far managed to find support ahead of $1933, the 38.2% retracement of the recent run up in prices as it continues to consolidate after briefly trading above $2000 on Monday. Whether the improved risk tone can be maintained will to a large extent depend on further developments in the banking/liquidity crisis and not least on today's FOMC meeting, where the Powell Fed faces the unenviable task of weighing financial stability risks against ongoing inflation risks.
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Global Market Quick Take: Europe
Macro Digest: Why the Fed is more likely to pause today than hike
Gold continues to consolidate after briefly trading above $2000 on Monday. Driven lower by an improve risk-on tone in the markets and higher Treasury yields. Key focus on the uncertainty around the Fed's interest rate decision and guidance at today's FOMC meeting, where the Powell Fed faces the unenviable task of weighing financial stability risks against ongoing inflation risks, with the market leaning more strongly for a hike now but watching whether the Fed is willing to cave on its "higher for longer" forward guidance. And in the event the Fed does pause, will the market celebrate this or be spooked that the Fed sees things as worse than feared?
Gold has so far managed to find support ahead of $1933, the 38.2% retracement of the recent run up in prices, and a rejection at this level would signal a weak correction within a strong uptrend, while further weakness may add some selling pressure from recently established spec longs. In the week to March 14 when gold reached $1911 hedge funds bought 61k lots, a 254% increase on the previous week and the biggest one-week adding of length since June 2019. That buying from managed money accounts was carried out at an average price estimated to be around $1893. Buying probably continued up until Monday, raising the mentioned risk of long liquidation, should today's FOMC decision end up having a negative impact on gold.
Overall, however, gold remains in an uptrend, both short- and medium-term.
Our gold monitor below shows continued outperformance relative to the dollar and ten-year yields with the recent buying being driven by the reset of Fed rate hike expectations, down from four to the current one-and-done. This abrupt change, driven by the current banking crisis, has seen hedge funds as mentioned rush back into the futures market while ETF investors last week bought the biggest amount of gold in a year.
The Saxo house view is that the FOMC will keep rates unchanged, and if that turns out to be correct gold may attract fresh demand, not least considering what it may do to medium- and long-term inflation expecations, as they could become unanchored from the current level below 2.5%.
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