The Fed’s surprise move on Sunday Makes Wednesday’s rate decision a non-event

Marec 18, 2020 10:30

Source: Economic Events March 18, 2020 - Admiral Markets' Forex Calendar

The state of Gold, given the recent developments around the Coronavirus, collapse in oil prices, and the massive monetary stimulus from the Fed last Sunday, is clearly bullish in the mid- to long-term. A run above 2,000 USD seems only a question of time, so the short-term picture stays way more complex.

On Sunday evening, the US central bank, the Fed, took a massive step: it cut rates to 0.0%-0.25%, launched a massive QE program of USD 700 billion, announced swap lines with global central banks to make sure that enough USD are available, and cut reserve ratios for banks to 0 in anticipation of today's Fed rate decision. This potentially makes the event a 'non-event'.

However, these extreme measures failed to lift the market. Equities and Gold dropped. Gold, usually a safe-haven by typically profiting from a dovish Fed and any US yield collapses, failed to gain momentum.

While we could certainly argue that this is a result out of the sharper bounce in US yields after its short-term drop below 0.3% over the last week, this seems only half the truth.

In fact, recent data from the Commitment of Traders Report underlines the point that the drop in Equities resulted in margin calls, which led larger market participants to reduce their Gold Long exposure to meet these.

In addition to this, traders should also recall the drop in Gold during the 2008 financial crisis, where a deflationary shock resulted out of the credit crunch which had a negative impact on the yellow metal with dropping and taking on momentum from 2010 onwards.

This time could be similar, meaning that despite elevated volatility and dropping US yields driven by risk-off tendencies, Gold may fail to profit and see a drop, going hand in hand with a dropping USD and dropping Equity prices.

While the mid- to long-term mode in Gold stays bullish, short-term a drop below 1,440/450 USD would technically darken the picture, activating 1,250/260 USD as a first target:

Source: Admiral Markets MT5 with MT5SE Add-on Gold Daily chart (between December 14, 2018, to March 17, 2020). Accessed: March 17, 2020, at 10:00 PM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the value of Gold fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, in 2019, it increased by 18.9%, meaning that after five years, it was up by 28%.

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