Brewing the big market rhythm: the market is too calm! Gold short-term pull close to 1735! Today’s “horror data” starts!

European stocks edged higher in the wait-and-see session on Tuesday ahead of this week’s key Federal Reserve decision, but uncertainty over the euro zone’s vaccine shot. FX markets remained in a tight range, with gold hovering at 1730, while the session focused on the so-called “horror data” of US retail sales.

Spot gold traded in a tight range on Tuesday trading around $1,730, awaiting further guidance. Investors awaited the outcome of the Fed meeting.

Gold rose slightly yesterday to close above $1,730. Benchmark U.S. Treasury yields retreated from their highest levels in more than a year, allowing gold, a non-yielding asset, to regain some of its appeal.

“Every time yields hit a high, gold hits a bottom,” said Phillip Streble, chief market strategist at Blue Line Futures in New York.

“At the moment, gold is rising on lower US Treasury yields and investors are taking the opportunity to buy gold at lower prices to bet on long-term uncertainties such as lower interest rates and higher inflation,” said Kunal Shah, head of research at Nirmal Bang Commodities in Mumbai.

Investors await the start of a two-day Federal Reserve meeting on Tuesday, which will focus on the recent sharp rise in bond yields, concerns about rising inflation and the economic outlook. That expectation has pushed up bond yields around the world in recent weeks. So far the Fed has played down such concerns.

“The Fed could comment on rising inflation concerns and even consider moving forward its asset purchases to compensate for higher yields, which would be very positive for gold,” said Margaret Yang, strategist.

But Michael McCarthy, chief market strategist at CMC Markets, warned that “optimism about an accelerated recovery in economic activity is dampening appetite for safe-haven assets,” and said gold’s rally would be difficult to sustain unless it broke above $1,740 on a short-term basis.

The yield on the 10-year Treasury note is now edging higher again, heading back above 1.6 per cent on Tuesday ahead of the Fed’s first policy meeting later in the day.

At 4 a.m. Eastern time, the yield on the benchmark 10-year Treasury note rose to 1.607%, while the yield on the 30-year note fell to 2.357%. Yields move inversely to prices.

Investors will be watching the Fed meeting closely to see if the central bank adjusts its interest-rate forecast or signals when it will scale back its bond-buying program. Fed Chairman Jerome Powell will hold a press conference after their meeting on Wednesday afternoon local time.

While there were some expectations the Fed might try to calm bond markets, which have seen yields rise about 60 basis points since the last Fed meeting, the prevailing view was that Fed Chairman Colin Powell would not change policy.

With vaccinations speeding up in the United States and a $1.9 trillion relief package reaching families, the U.S. economy looks better than most advanced economies.

Much has changed since the Fed last updated its economic forecasts in December. At the time, gross domestic product was expected to grow 4.2 percent by the end of the year and unemployment to fall to 5 percent. Federal Reserve officials this week are likely to forecast that the U.S. economy will grow at its fastest pace in decades in 2021, while unemployment will fall and inflation will rise.

“Overall, economic conditions are improving further. What will be decisive for markets will be how the major central banks react to this, “You-na Park-Heger, currency and emerging markets analyst at Commerzbank, wrote in a note to clients.” The Fed is expected to once again try to dampe expectations of a reversal in U.S. monetary policy. But we will have to see to what extent the Fed can convince the market to buy it, “she said, adding that euro/dollar is expected to remain at current levels until the outcome of the meeting is clear.

Gregory Peters, director of strategy at PGIM Fixed Income in New York, said the market will be looking for signs of a change in Fed monetary policy from the Fed’s post-meeting statement and comments from Chairman Colin Powell. But he believes there is little chance of a change in monetary policy.

In the session, the focus is on US retail sales data. U.S. retail sales are expected to fall 0.5 percent on a monthly basis in February after rising 5.3 percent the previous month, the survey showed. The survey also showed core U.S. retail sales were expected to rise 0.1 percent in February after rising 5.9 percent the previous month.

Further stronger-than-expected data could spur another rise in Treasury yields and thus the dollar, though investors are likely to hold back from aggressively building positions ahead of the key Fed decision.

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