Thursday (January 21) in the Asian session, the dollar index continued to be under pressure, is now trading around 90.35; Spot gold extended gains after yesterday’s rally, trading above $1,872 an ounce. Joe Biden was sworn in as the 46th president of the United States at noon local time on January 20. Prospects for more U.S. economic stimulus once Biden takes office have spurred gold prices sharply higher. On Thursday evening in Hong Kong time, investors will get the ECB decision and ECB President Christine Lagarde’s press conference, which is expected to trigger volatility in the euro exchange rate. Markets expect Lagarde to express concern about the strength of the euro, and if so, the single currency could be hit by selling.
The Biden era begins with gold bulls rejoicing
Joe Biden was sworn in as the 46th president of the United States on Wednesday, vowing to end what he called a “non-civil war” in the bitterly divided nation. Biden’s swearing-in has raised hopes for a new economic stimulus package and a smoother rollout of vaccines. The new U.S. administration is expected to push a nearly $2 trillion fiscal stimulus package through Congress.
Gold prices rose sharply on Wednesday on expectations that further fiscal stimulus under the Biden administration would weigh on the dollar. Spot gold closed Wednesday at $1,871.75 an ounce, up $31.62, or 1.72 percent. On Thursday, gold continued to rise to $1,872 / ounce.
According to Economies.com, gold successfully hit our first waiting bullish target of $1,871.55 an ounce on Wednesday. A break above $1871.55 would open the way for a continuation of the bullish trend, with $1888.30 next target. It is important to keep in mind that a continuation of gold’s bullish trend is conditional on gold staying above $1,850.80 an ounce, Economies.com adds.
Edward Moya, senior market analyst at OANDA, told Kitco News that a lot of the rally in gold is due to investors believing that the Biden administration will work well with the Treasury to provide a lot of stimulus in the first 100 days. The current virus situation does require more support for the economy.
“The $1,900 level is likely to be the short-term resistance level for the week, and if the rally continues to gain strong support, I wouldn’t be surprised to see gold at $1,950 by the middle of next month, as long as we put in at least $1 trillion in stimulus, that will be enough to support further gains,” Moya said.
Chintan Karnani, chief market analyst at Insignia Consultants, said additional fiscal stimulus is expected to be announced soon, while more government spending will generate more debt, leading to a weaker dollar and boosting gold prices.
Karnani added that U.S. Treasury yields will fall when additional stimulus measures are announced, which is also positive for gold. Gold in the short term depends on other stimulus announcements, the dollar and the direction of Treasury yields.
In the $1.9 trillion stimulus package that Biden announced last week, Americans will receive $1,400 in cash support, for a total of $2,000 per person, plus a $600 package passed by Congress in December 2020. Unemployment benefit insurance will be raised to $400 a week from $300 and extended until September.
On January 19, local time, the US Senate Banking Committee held a hearing on the nomination of Janet Yellen as US Treasury secretary. In her testimony, Yellen urged lawmakers to “take big action” on the next coronavirus mitigation plan. “With interest rates at historic lows, the wisest thing to do is to act aggressively,” Ms Yellen said.
Phillip Streible, chief market strategist at Blue Line Futures, said: “There is a lot of optimism that Biden will probably make it a priority by passing more stimulus. There is a real expectation that Biden and Treasury secretary nominee Janet Yellen will roll out more easing in the future. We are cautiously optimistic on gold.”
Some analysts believe the strong rise in gold is the start of a new bull market that could see the price get closer to $2,000.
Howie Lee, analyst at OCBC Bank, said: “The $2,000 gold price is still possible, probably in the middle of the second quarter, when a lot of people have been vaccinated, there will be a lot of cash in the system and demand is almost back to normal. That’s when people will start to pay a lot of attention to inflation.”
“The market is expecting a return to the idea of a quick fiscal stimulus in the United States,” said Simon Harvey, senior currency analyst at Monex Europe. “It was always assumed that a massive fiscal stimulus package would get broad bipartisan support in the Senate, not a lengthy reconciliation process.”
Jeffrey Sica, founder of Circle Squared Alternative Investments, said the possibility of more stimulus was very positive for gold. Gold is considered a hedge against inflation and currency devaluation.
Joe Foster, portfolio manager of VanEck International Investors Gold Fund, says inflation could surpass the Fed’s 2% target as early as April, and that a high-inflation environment will be the main catalyst for Gold to break its all-time high above $3,000 an ounce.
The European Central Bank’s decision comes in heavy weight
The ECB will announce its interest rate decision at 20:45 Hong Kong time on Thursday. European Central Bank President Christine Lagarde will hold a press conference at 21:30 Hong Kong time on Thursday. The European Central Bank is widely expected to leave monetary policy unchanged at its current rate decision, but paints a bleak picture of the economic outlook.
Local time on December 10, the European Central Bank announced that the emergency anti-epidemic bond purchase program (PEPP) will increase the scale of 500 billion euros. PEPP will run until at least the end of March 2022. In addition, the ECB also said that the third round of targeted long-term refinancing operations (TLTRO) preferential rates will continue until June 2022. Will reinvest maturing PEPP bonds at least until the end of 2023.
On the euro exchange rate, the ECB said at the time that it would continue to monitor exchange rate movements. The ECB said it remained ready to adjust all its instruments as needed.
Analysts at FXStreet believe the ECB will keep its policy stance unchanged, but paint a bleak picture of the economic outlook.
The surge in cases of Covid-19 in Europe, new pandemic restrictions in key European countries such as Germany and France, and the slow pace of introduction of the new crown vaccine have cast doubt on the pace of recovery in the eurozone.
Althea Spinozzi, fixed income strategist at Saxo Bank in Denmark, said: “At this point, the ECB remains in a somewhat desperate position and has no choice but to continue supporting the economy until the downside risks are clearly removed.”
At a news conference, European Central Bank President Christine Lagarde is expected to express concern about the strong euro and the low inflation it is causing.
Inflation in the euro zone is already near record lows, and the euro’s recent climb has dragged it down further.
At an event earlier this month, Lagarde said the ECB would pay close attention to the euro exchange rate and its impact on consumer prices.
VilleruvardeGallo, a member of the European Central Bank’s governing board, also stressed the need to investigate any negative impact of the euro’s rise on inflation.
“The recent euro strength, if unchecked, is likely to test the recovery in the eurozone,” Credit Agricole CIB wrote in a research note published last week.
Given the deterioration in the outlook since December, markets may further start to expect the ECB to “double down” on its efforts to weaken the euro at its January policy meeting, notes Agricole.