By Jameel Ahmad, Chief Analyst at CompareBroker.io
They say that “if at first you don’t succeed, try, try again” and that has very much been the story of Gold buyers who have repeatedly threatened to open the doors of $2,000 and finally managed to do so on Monday.
The stay above $2,000 was brief, but also very important because it has been threatening this move for weeks.
Resilience and continued demand for the USD as recession fears circulate, banks continue to collapse and anticipation of the Fed pulling the trigger on a final increase to the United States interest rate this week, all likely led to Gold pulling back.
The near-term decline in Gold momentum after finally breaking above $2,000, albeit briefly, could be swiftly reversed should the Federal Reserve deliver a downbeat assessment on its future monetary policy path over the next few days.
The momentum of world markets to withstand economic pressures has also been somewhat reliant on the hope that the Fed will not shock with an unforeseen policy shift. There has been a continued narrative that the Fed will remain consistent at maintaining the course with its interest rate cycle and the U.S central bank is expected to conclude raising interest rates on Wednesday.
Focus will then quickly turn towards Fed officials beginning to prepare for potential decreases to the US interest rate.
This is the signal that Gold investors will most likely want to hear for the precious metal to maintain a more prolonged stay above $2,000.
Markets continue to ignore banking stress
Market players continue to ask why markets have not fallen further amid what has become a rising number of banks collapsing this year.
The events of Silicon Valley Bank, Signature Bank and now First Republic Bank in the U.S., as well as Credit Suisse in Europe, should have resulted in more noise across financial markets.
The market does not ultimately have any clarity or know-how regarding as to how the ongoing banking stress might drag on economic growth, with this element also encouraging the ongoing choppy trading environment.
Such woes will continue to drag on consumer sentiment. Yet, we have also encountered the fastest cycle of interest rate increases by the Fed in a generation.
Therefore, if economic data were to hit the floor moving forward and an economic downturn was impending, questions would remain unanswered as to whether the slowdown was due to banking sector distress or the Fed.
There is also an element that for Wall Street specifically, the technology sector now contributes to such an extensive market cap that it has an increased influence over the performance of markets.
Due to the earnings updates from tech giants suggesting that they are faring reasonably well despite economic challenges, markets have so far withstood the banking pressures.
Yellen warns of US default
If the ongoing signs of distress within the U.S. banking sector was not enough of a worry, former Fed Chair and current Treasury Secretary Janet Yellen warned that the United States government risks hitting its debt ceiling and possible default by June 1.
We have been here many times before and likely will continue to do so, but the risk of the largest economy in the world defaulting will continue to be under-priced for as long as investors expect for the debt ceiling to be raised once again.
We are likely to get an extension until September in what is very much a case of the can being kicked down the road. However, this is something that has always been the case when it comes to the debt ceiling in the U.S. as this issue has presented itself numerous times over the years.
GBPUSD and EURUSD dip
The British Pound commenced the first trading week of May on the back foot after approaching around 11-month highs above 1.25 towards the end of April.
Prior to next week’s Bank of England interest rate decision and UK GDP preliminary figures for Q1, the current week for the United Kingdom economy in terms of tier-one economic data releases is slightly thin on the ground in comparison to that of the U.S. and Europe.
Therefore, market confidence is likely to lead Pound sentiment and the ongoing choppy trading environment is seen as a potential catalyst for a further gradual pullback in GBPUSD.
In comparison, the EURUSD could be the FX pair to watch this week.
The ECB interest rate decision is going slightly under the radar considering the continued focus on its peers in the U.S. in the Fed, but a hawkish undertone from the European Central Bank combined with the Fed suggesting a downbeat outlook is likely what is needed for the EURUSD to finally find the courage for a clean break above 1.10.
Heightened anticipation of the Fed pulling the trigger on a further US interest rate increase alongside the appeal of the USD as an asset of safety during a choppy trading environment clouded over by recession fears, is a risk to pinning down an air of underperformance in the Euro and Pound through the next few sessions.
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