The dollar index continued to come under pressure in Asian trading on Wednesday and is now below the 100 mark. Spot gold, boosted by a weaker dollar, held up at around $1,705 an ounce. On Wednesday evening, investors will welcome a speech by federal reserve chairman colin Powell, which is crucial given recent market expectations of a negative interest rate. If Mr Powell’s comments raise expectations of a negative interest rate, the dollar could take a further hit and gold could continue to rise.
Mr Powell’s comments came amid caution about a sell-off in the dollar
Fed chairman colin Powell will speak on the economy at 9 a.m. local time on May 13 (9 p.m. Beijing time on May 13).
The dollar fell Tuesday as market sentiment turned cautious a day before federal reserve chairman colin Powell spoke on the economy and investors weighed the possibility of negative U.S. interest rates.
The dollar index.dxy closed down 0.22 percent at 100.01, after hitting an intraday low of 99.66. The dollar index was near 99.95 in Asian trading on Wednesday.
“The dollar is still stuck in a wide range and Tuesday’s weakness could be due to caution ahead of Powell’s speech on Wednesday, especially given the current discussion of negative interest rates,” said Joe Manimbo, analyst at western union business solutions market.
While Mr Powell and fed officials have all but ruled out the possibility of a negative rate, the market has begun to price it in.
Fed funds futures on Tuesday showed investors pricing in the possibility of a rate of about -0.5% in April 2021.
The interest-rate options market suggests a 23 per cent chance that the fed funds rate will turn negative at the end of December, according to bank of America data, compared with 9 per cent to 10 per cent last week.
Fed chairman colin Powell is due to speak on the economy on Wednesday and is bound to be asked about negative interest rate expectations.
Analysts said the dollar could rally if Mr Powell’s speech reversed expectations of negative interest rates. If Mr Powell’s comments raise expectations of negative interest rates further, the dollar is set for an even sharper sell-off.
Lou Crandall, an economist at Wrightson ICAP, warned in a note Friday that the longer the fed tolerates negative interest rate expectations in futures markets, the more people will believe that overnight rates will follow.
Ebrahim Rahbari, chief G10 currency strategist at citi, said: “given the limited degree to which the market has so far priced in and the continuing fear that the us is’ devaluing ‘the dollar, the possibility of negative rates is a bit of a dollar negative.”
However, Rahbari added that a strong push by the United States for aggressive fiscal and monetary stimulus is expected to boost the U.S. economic recovery and attract capital inflows, supporting the dollar.
Joe Manimbo, senior market analyst at western union business solutions in New York, said dollar moves this week will be influenced by fed chairman colin Powell’s speech on Wednesday, as well as data on U.S. jobless claims and retail sales.
On Tuesday, U.S. President Donald trump again urged the federal reserve to adopt negative interest rates. The move comes after some fed members said they saw no need to move interest rates, currently close to zero, into negative territory.
Gold bulls are brewing
Spot gold held up in Asia on Wednesday, trading around $1,705 an ounce. Gold prices rose on Tuesday on expectations the federal reserve will introduce more stimulus measures to support an economy hit by restrictions triggered by novel coronavirus, while a weaker dollar further supported gold prices.
International spot gold week rose as high as $1710.60 an ounce in intraday trading to $1702.04, up $6.22, or 0.37%.
On Tuesday, the fed will begin buying etfs that invest in bonds through the secondary market corporate credit facility. The tool is one of several recently created by the federal reserve to improve market function in the wake of the novel coronavirus pandemic.
“The fed is going to start buying bond exchange traded funds for the first time, and that’s the big story,” said Michael Matousek, head of trading at U.S. Global Investors. “There are more stimulus packages coming out, and everybody knows that when there are more stimulus packages coming out, everybody wants to hold more gold.”
Matousek added: “gold has been trading in a range for the last month and a half. One of the positive factors driving gold’s breakout has been more global talk of more stimulus.”
According to an article by leading financial website Economies.com, the four-hour chart shows gold resuming its upward trend and breaking the EMA 50 index, which supports its bullish view on gold prices. In addition, random indicators also constitute a positive impact. The main bullish target for gold is currently awaiting testing at $1,747.43 an ounce, with a higher target at $1,785.00.
Economies.com cautioned that keeping gold above $1,678.45 an ounce is critical for the metal to continue its expected rally. If gold were to break above $1,722.00 an ounce, that would help push the price further towards the bullish target.
Economies.com expects short-term support and resistance to gold at $1,685.00 an ounce and $1,333 an ounce, respectively.
Some market participants said gold’s long-term outlook was positive as it tended to benefit from extensive central bank stimulus because it was widely seen as a hedge against inflation and currency depreciation.
Gold has risen more than 12% this year as central Banks around the world have launched a series of stimulus measures to limit economic losses.
Chris Weston, director of research at Pepperstone, said gold has reasons to rise in the face of global fiscal deficits, currency depreciation, negative interest rate bonds and inflation, and the next key level to watch is $1,738 an ounce.
“The gold market has been in the $1,738 to $1,678 range since mid-april,” Weston said. “it’s a very interesting phase to be in. If gold can effectively break through the $1,738 level, investor interest will pick up and the bullish trend will continue.”
TD Securities commodity strategist Ryan McKay says negative interest rates, likely early next year, will help gold out of its troubles and need to be watched this week.