June 13, 2024

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Gold finally breaks above $2000 before surrendering advance

4 min read

They say that at first if you do not succeed, you must keep on trying and that has very much been the story of Gold buyers who have repeatedly threatened to open the doors of $2000 and finally managed to do so on Monday. 

The stay above $2000 in Gold was brief, but also very important at the same time because it has been threatening this move for weeks. Resilience and continued demand for the USD as recession fears circulate, banks continue to collapse and anticipation of the Fed pulling the trigger on a final increase to the United States interest rate this week all likely led to Gold pulling back. The near-term decline in Gold momentum after finally breaking above $2000 albeit briefly could be swiftly reversed should the Federal Reserve deliver a downbeat assessment on its future monetary policy path over the next few days.

The momentum of world markets to withstand global economic pressures has also been somewhat reliant on the hope that the Federal Reserve will not shock with an unforeseen policy shift. There has been a continued narrative from the Fed that it will remain consistent at maintaining the course with its interest rate cycle and the U.S central bank is expected to conclude raising United States interest rates tomorrow.

Focus will then quickly turn towards when Fed officials will begin preparing the market for potential decreases to the US interest rate. This is the signal that Gold investors will most likely want to hear for the precious metal to maintain a more prolonged stay above $2000. 

Why global markets continue to ignore banking stress

It is very much correct for market participants to ask questions regarding why global markets have not fallen further amid what has become a rising number of banks collapsing this year. The events of Silicon Valley Bank, Signature Bank and now First Republic Bank in the United States as well as Credit Suisse in Europe should have resulted in more noise across financial markets.  

The market does not ultimately have any clarity or know-how regarding as to how the ongoing banking stress might drag on economic growth with this element also encouraging the ongoing choppy trading environment that investors are dealing with. The crux of the matter is that on headline, of course such woes will drag on consumer sentiment. Yet, we have also just encountered the fastest cycle of interest rate increases by the Fed in a generation.

Therefore, if economic data were to hit the floor moving forward and an economic downturn was impending questions would remain unanswered as to whether the slowdown was due to banking sector distress or the Fed.

There is also an element that for Wall Street specifically, the technology sector now contributes to such an extensive market cap that it has an increased influence over the performance of global markets. Due to the earnings updates from technology giants suggesting that they are faring reasonably well despite global economic challenges, financial markets have so far been able to withstand the banking pressures. 

Yellen warns of possible US default

If the ongoing signs of distress within the U.S. banking sector was not enough of a worry, former Fed Chair and current Treasury Secretary Janet Yellen warned that the United States government risks hitting its debt ceiling and possible default by June 1. We have been here many times before and likely will continue to do so, but the risk of the largest economy in the world defaulting will continue to be under-priced for as long as investors expect for the debt ceiling to be raised once again.

We are likely to get an extension until September time in what is very much a case of the can being kicked down the road. However, this is something that has always been the case when it comes to the debt ceiling in the United States as this issue has presented itself numerous times over the years. 

GBP/USD and EUR/USD dip in momentum

The British Pound has commenced the first trading week of May appearing on the back foot after approaching around 11-month highs above 1.25 towards the end of April.

Prior to next week’s Bank of England interest rate decision and UK GDP preliminary figures for Q1, the current week for the United Kingdom economy in terms of tier-one economic data releases is slightly thin on the ground in comparison to that of the United States and Europe. Therefore, global market confidence is likely to lead Pound sentiment and the ongoing choppy trading environment is seen as a potential catalyst for a further gradual pullback in GBPUSD.

In comparison, the EURUSD could be the FX pair to watch this week for traders. The European Central Bank interest rate decision is going slightly under the radar considering the continued focus on its peers in the United States in the Fed, but a hawkish undertone from the ECB combined with the Fed suggesting a downbeat outlook is likely what is needed for the EURUSD to finally find the courage for a clean break above 1.10.   

Heightened anticipation of the Fed pulling the trigger on a further US interest rate increase alongside the appeal of the USD as an asset of safety during a choppy trading environment clouded over by recession fears is a risk in the meantime to pinning down an air of underperformance in each the Euro and Pound through the next few sessions though.

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