The European Central Bank (ECB) last week tipped back the EUR-negative political divergence that supported the EURO until the end of the week.
While there are good reasons to be wary of EURUSUD in the short term, despite a still fragile political situation, the moderate procyclical beta of the single currency and its positive correlation with equity and commodity prices should limit the downside.
The euro outperformed on Friday as the risk-off move negatively impacted all of these short EUR crosses, more so than the euro itself. While the performance of the single currency given the fact that BTPs versus Bunds broke new ground is a little surprising when the Italian Prime Minister Conte thinks about an early election.
But the key on Friday was the risk of the road deviating from the short-term boards.
Sterling traders paid the price on Friday for Thursday’s exuberance as bullish pound bets hit by visions of further success in the services sector were signaled by UK Prime Minister Boris Johnson that the lockdown could last into the summer.
Oddly enough, the Prime Minister made these comments despite successful vaccinations and a slowdown in the rate of growth in cases. In a fact or fiction trade, traders will always be working with the facts, so Cable came back and was steadfast at 1.3635 support.
Last but not least, while the road is unlikely to remain bumpy given the optimism of the vaccine, investors will be under pressure to hold prices on cyclical assets, especially cyclical EM currencies.
Gold investors focus on economic progress
Gold investors will continue to monitor progress on fiscal stimulus. The dialogue seems to be shifting to a lower top-end number, which from a “bigger is better” perspective doesn’t suit gold.
And last week’s market reaction to favorable US economic data with lower bond yields suggests the FOMC may not have much of an impact unless the board surprises the markets with a hint of a conical retreat date.
The bond traders will then begin to throw arrows at this target and negatively increase the return on gold. Regardless, I expect the market to negate a longer-term premium on gold sometime in the first or early second quarter, indicating an ultimate top-end capper between $ 1950 and $ 60.
It’s not entirely clear what sparked the big metal sell-off on Friday as it was a pretty big oversized move compared to the rate markets reaction. Perhaps thoughts turn to the anticipated physical New Year celebrations, the bonanza withers, and with much of the US economic event, be it 1.5 or 1.9 trillion, priced into the golden cake, leaving investors headlines and back channels for the discussion about shifting the focus of central banks tends to be upward.
It will undoubtedly be a long process to normalize monetary policy. Still, central banks have already begun shifting towards upside scenarios that broader vaccinations this year could shock virtually any gold investor.
In that regard, the vaccine will change central bank policy and likely change the price of gold as well. I firmly believe their policies inspired the prime, and it will be up to inflation to do the bulk of the heavy lifting from now on.
The decline in precious metals didn’t seem as severe given the broader movement across a number of asset classes. From stocks to commodities, including petroleum to agricultural goods, they all fell behind for much of the day.
Gold and the other precious metals reduced losses at the end of the day, as did other commodities, including oil.
In the week ahead, we’ll see the progress made on the $ 1.9 trillion stimulus package. Presumably, the smoother the package, the cheaper gold is.
On the central bank front, the highlight is the FOMC’s decision. The FOMC meeting should endorse gold, but not new news.
Robust GDP data could weigh on gold if yields react higher but support silver and the PGM. All in all, gold could trade a very modest increase between $ 1825 and $ 1875 before the Federal Reserve meeting.
FX and gold market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi