In Asian session on Thursday, the DOLLAR index was little changed at around 94.40. Spot gold continued to come under pressure, currently trading below $1,860 an ounce. If the dollar remains strong, gold is at risk of further declines, as has been the recent dramatic pullback in the price of gold following the dollar’s sharp rise. In addition, technical indicators suggest that gold may continue to fall. Investors will be paying attention when Federal Reserve Chairman Colin Powell makes his reappearance Thursday night Beijing time. On the geopolitical front, tensions between China and India on the border showed signs of easing, but tensions remained high across the Taiwan Strait as Taiwan officials confirmed that People’s Liberation Army aircraft had flown around the island for the sixth time in the past seven days.
Gold tumbled on Wednesday to its lowest close in two months as the dollar continued to strengthen. Spot gold closed at $1,863.05 an ounce, down $35.76, or 1.88 percent, after hitting an intraday low of $1,855.00 an ounce.
Gold prices continued to fall sharply on Wednesday and hit $1,860.90 an ounce, our main waiting target, according to Economies.com. As bearish pressure continues, a break below $1,860.90 would push gold lower and open the way for a major downside target of $1,794.85 an ounce.
Chicago Fed President Charles Evans was the trigger for the dollar’s rally on Tuesday, putting significant downward pressure on gold prices. In a speech Tuesday, Mr. Evans suggested the Fed could raise its benchmark interest rate sooner than expected. The Fed’s benchmark interest rate is currently between 0% and 0.25%.
“We can start raising interest rates before the average gets to 2 per cent and we need to talk about that,” Mr Evans told a discussion organised by the international economic policy forum OMFIF.
Mr Evans said that without another package of fiscal support, the US economy risked a longer and slower recovery or even an outright recession. Mr Evans also said he did not believe open-ended quantitative easing was an important part of the solution.
The comments sent expectations of a fed rate hike soaring and sent the dollar index above 94 for the first time since July 28. The dollar index is up 1.3 per cent so far this week.
Mr Evans is not a voting member of the Federal Open Market Committee this year, but he will be in 2021. Mr Evans is generally regarded as a dovish official.
Erik Nelson, macro strategist at Wells Fargo Securities, said: “All we’ve heard from the Fed over the past few months is that we’re not going to raise rates for the foreseeable future. Then Evans came in and challenged that, so the market was caught off guard.”
“Evans’ comments are very hawkish,” said Edward Moya, senior market analyst at OANDA in New York. He mentioned a pause in quantitative easing and interest rate increases until the inflation target was reached. That took the market by surprise. “The sooner we get to the other end of the virus, the sooner we will see expectations of rate hikes rise, which should further fuel the dollar rally.”
Kitco.com senior analyst Jim Wyckoff wrote, “The recent rally in the U.S. dollar index, as well as the mid-week rally in global equities, have been bearish for the precious metals market. There is a serious danger that gold’s recent rally will come to an end.”
Precious metals prices have been under selling pressure since the start of the week as an increase in novel Coronavirus cases in Europe and the US prompted investors to unwind gold and silver bets and switch to the US dollar, further weighing on gold buying.
“Dollar strength is weighing on gold and there is no stimulus package coming out of Washington, but we believe gold is fundamentally and technically oversold and we are not going short here,” Edward Meir, an analyst at ED&F Man Capital Markets, wrote in a report on Wednesday.
“The dollar is staying strong, which is fundamentally depressing gold prices,” said Chris Gaffney, President of World markets at TIAA Bank.
George Gero, managing director of Royal Bank of Canada Wealth Management, said it was not surprising to see a lot of selling in the gold market because of a combination of factors. He noted that the threat of a second wave of blockades was dragging down economic growth, which in turn was dragging down the stock market. Gero added that concerns are now more serious because investors are not holding out much hope for new stimulus measures to protect the economy. He added that if no new stimulus measures were announced, gold prices would continue to struggle.
“Gold should be higher on safe-haven demand, but it’s a bit like a replay of the spring sell-off, where market participants have been selling across the board,” said Bob Haberkorn, senior market strategist at RJO Futures in New York. It’s just a lack of safe-haven buying, which comes after the stock market sell-off, and a stronger dollar is another weakness.”
Tai Wong, head of base and precious metals derivatives trading at BMO, said: “The chances of Congress agreeing on any stimulus package by January are getting close to zero. Gold needs to bounce back and close above $1,900 in the short term, but it looks like we may have to test the $1,863 low at some point in the near future.”
At 22:00 Beijing time on Thursday, Federal Reserve Chairman Colin Powell and US Treasury Secretary Steven Mnuchin will appear before the Senate Banking Committee to report on coVID-19 assistance and other issues. It was Also Powell’s third consecutive day.
Federal Reserve Chairman Jerome Powell told a congressional panel Tuesday that while the U.S. economy has “significantly improved” since the novel Coronavirus pandemic plunged it into recession, the road ahead remains uncertain and the Fed will take more action if necessary.
Federal Reserve Chairman Colin Powell told Congress on Wednesday that further fiscal stimulus was needed if the U.S. economic recovery was to continue. “It’s good that we’ve come a long way very quickly,” Powell said. But there is still a long way to go. So what I’m saying is, all of us have to keep at it. If there is support from Congress and the Federal Reserve, the recovery will be faster.”
When members of Congress questioned whether the Fed’s actions were helping ordinary Americans or the markets, Mr Powell said: “Our actions were never intended to ease the pain on Wall Street. We have done basically everything we could think of and of course we are looking to do more.”
Minh Trang, a senior currency trader with Silicon Valley Bank, said: “We all know that viruses do not live in a vacuum. What you see in one country or region can affect other places. Economically, this could have an impact. “Typically, when there are some concerns and some unknowns, investors look to the dollar as a temporary safe haven.”
In addition to fed officials’ comments, the dollar was also driven higher by safe-haven buying amid concerns over a rise in novel Coronavirus infections in Europe and weak European economic data.
The dollar index.DXY closed at 94.37 on Wednesday, up 0.41 percent, after hitting an intraday high of 94.44, an eight-week high. The dollar index hovered around 94.40 intraday Thursday.
The dollar was also helped by a lack of progress on a fiscal stimulus deal in Washington, which worried investors about the outlook for the US economy.
David Meger, head of metal trading at High Ridge Futures, said the death of U.S. Justice Ginsburg is expected to create more divisions between Democrats and Republicans, making an economic stimulus package less likely.
“The safe-haven status of the dollar is in full play, and could show strength if equity markets continue to wobble or plummet,” said Brendan McKenna, currency strategist at Wells Fargo in Greenwich, Connecticut.
“The market continues to reassess its previously very bullish stance on global risk,” said Ben Randol, senior currency strategist at Bank of America Securities in New York. The news about the virus and economic growth has been negative.”
Randol also cited comments by Federal Reserve officials that were not as dovish in tone as markets had expected. Chicago Fed President Charles Evans floated the idea of raising interest rates on Tuesday, sending investors fleeing to the safety of the dollar. Then on Wednesday, Federal Reserve Vice Chairman Larry Clarida said policy makers “won’t even begin to consider” raising interest rates until inflation reaches 2 percent.
Mr Clarida’s comments “suggest that the Fed retains the right to raise interest rates earlier than expected if it believes inflation will become a problem”, Randol said.
The Federal Reserve pledged on Wednesday to keep interest rates near zero until inflation “modestly exceeds” its 2 per cent inflation target “for an extended period”. However, the Fed also said it expected the economy to recover more quickly than previously thought and the unemployment rate to fall faster than it had expected in June.
Projections by Fed officials suggest that interest rates are likely to remain near zero until 2023. Moreover, the Fed now thinks US GDP will shrink by 3.7 percent in 2020, better than the 6.5 percent fall it forecast in June.