On Tuesday (March 14), international gold prices fell slightly from the overnight high of $1,914.48 an ounce since February 3, but were still trading above the important mark of $1,900, as the market expected the Federal Reserve to trade in two large regional markets. The pace of interest rate hikes slowed after the bank collapsed. The Fed will be in a tricky position if the upcoming U.S. inflation figures for February come in higher than expected.
At 15:12 Beijing time, spot gold fell 0.13% to $1,910.91 an ounce; the main COMEX gold futures contract fell 0.05% to $1,915.7 an ounce; the U.S. dollar index rose 0.23% to 103.855.
U.S. officials have announced several measures to limit the blow to the banking system from the failure of the Silicon Valley bank. Regulators also shut down New York-based Signature Bank. It was the largest bank failure in the United States since the 2008 financial crisis. That prompted market participants to trim their hawkish bets on the Fed.
IG market analyst Yeap Jun Rong said: “As the risk environment stabilizes, investors may have to seek validation from the upcoming US CPI data whether the Fed’s rate hike outlook is no longer as hawkish as previously thought. If Data surprises again, and the Fed could become even more hands-off in its policy decisions.”
Markets are now pricing in a 69.6% chance the Fed will raise rates by 25 basis points at its policy meeting next week. Before the bankruptcy event, the Fed will likely raise interest rates by 50 basis points this month. But before the Federal Reserve provides clearer information on the spread of the banking crisis, investors will pay more attention to the U.S. consumer price index (CPI), which will be released at 20:30 Beijing time on Tuesday.
Analysts at Credit Suisse expect: “Core CPI inflation is expected to hold steady at 0.4% mom in February, leading to a slight decline in the year-on-year reading to 5.5%. Energy and food prices are likely to moderate and headline inflation will also hit 0.4% month-on-month. A reading in line with our expectations would still be uncomfortably high inflation for the Fed, but consistent with the gradual deflation that kicked off at the start of the year.”
One view is that the Fed’s rate hike cycle is to curb inflation “at all costs.” On the other hand, the Fed cannot continue its current monetary policy when the financial system is suffering potential damage. Generally speaking, the part of inflation led by the service industry is irreversible, and most advanced economies rely heavily on the service industry. So the Fed would be in a tricky position if the inflation figures were higher than expected.
Strategists at ANZ raised their forecasts for gold. They believe that the downside of gold prices is limited, with a three-month target of $1,800. At the same time, they raised their gold price forecast by the end of the year by $100 to $2,000. “We expect gold prices to remain above $1,800 in the near term. Any dips below that level should be short-lived as buying opportunities may arise.”