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Gold Prices Eye BOC After Fed Rate Cut Amid Coronavirus Fears

Gold Prices Eye BOC After Fed Rate Cut Amid Coronavirus Fears

2020-03-04 07:00:00
David Cottle, Analyst
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Gold and Crude Oil Talking Points:

  • Gold prices have bounced back to within sight of this year’s notable highs
  • Tuesday’s shock US rate cut has seen bond yields fall, supporting non-yielding gold
  • Crude oil prices have gained too as the market hopes for major production cuts

Gold prices were steady through the Asia Pacific Wednesday session, retaining gains made in US hours when the Federal Reserve slashed borrowing costs in an attempt to mitigate the economic effects of the coronavirus outbreak.

The Fed’s surprise half-percentage point reduction came on the heels of a more widely expected cut to Australian interest rates this week. The prospect of lower global interest rates and, therefore, bond yields increases the attraction of holding gold as its lack of yield becomes less of a problem. Risk-free financial assets such as US Treasuries are among the metal’s closest rival’s in the haven asset sphere and, with ten-year yields there now down to record lows, the environment looks very supportive of gold.

The Bank of Canada will give its March monetary policy decision later in the global day. It may well join in the growing round of monetary easing even though surveys of economists taken before this week’s Fed action didn’t expect a rate cut.

Various Purchasing Managers Indexes are also due from around the Eurozone and US. The Chinese versions of these timely snapshots have underlined the coronavirus’ drag on that economy. Gold may get more support if a growing impact is evident elsewhere.

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Crude oil prices were higher as energy markets anticipate significant cuts in production will be announced later this week.

A panel from the Organization of Petroleum Exporting Countries and allies including Russia, the so-called ‘OPEC Plus’ group, has recommended taking an additional million barrels per day out of the market. This may mean that Saudi Arabia and Russia are close to settling well-publicized differences stemming from initial Russian reluctance to move.

US time Wednesday will bring the release of official inventory data but with markets focused on both the coronavirus and this week’s OPEC Plus meeting in Vienna it may struggle to move prices far.

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Gold Technical Analysis

Gold Prices, Daily Chart

Prices have once again soared above the broad trading band at which gold has had solid support since early January. They are very close to a resistance area which guards the way back up to 2020’s eight-year highs. It remains to be seen whether an interest rate cut from the Bank of Canada can provide the impetus needed to top those highs, but such a move should see gold back into that trading band, at least.

Crude Oil Technical Analysis

US Crude Oil Prices, Daily Chart

Hope of those production cuts have seen arguably quite modest gains for US crude oil prices so far. The downtrend channel which has dominated trade since January remains very much in command. The bounce seen in the last four days was initiated at the lows of 2019 but it’s notable that, even with significant supply reductions expected, the price is still yet to top the psychologically important $50/barrel point.

It may very well manage to rise above this area should cuts be announced this week, with channel-top resistance at $51.12 also likely to come into play in that case.

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--- Written by David Cottle, DailyFX Research

Follow David on Twitter@DavidCottleFX or use the Comments section below to get in touch!

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