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XAU/USD: Gold Glistens as FOMC Cuts Rates to Combat Coronavirus

XAU/USD: Gold Glistens as FOMC Cuts Rates to Combat Coronavirus

2020-03-03 20:00:00
Rich Dvorak, Analyst
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XAU/USD: SPOT GOLD PRICE ACTION SET FOR BIGGEST INTRADAY GAIN SINCE 2016 AFTER FOMC OFFICIALS UNANIMOUSLY DELIVER EMERGENCY RATE CUT AMID CORONAVIRUS OUTBREAK

  • Spot gold (XAU/USD) looks set on recording its biggest daily gain since May 2016 with the precious metal rallying over 3.5% during Tuesday’s trading session
  • Gold price action is now up nearly 10% year-to-date and is primarily attributed to widespread risk-aversion and market volatility amid the novel coronavirus outbreak
  • FOMC officials just unanimously announced an emergency 50-basis point interest rate cut hoping to counter a global supply chain shock and drag on global GDP growth

The price of gold is spiking higher and sets bullion on track to notch its largest intraday gain since May 2016. Spot gold prices have climbed in excess of 3.5% to trade above the $1,640 per ounce level at the time of writing.

News of a shock 50bps cutby the Federal Reserve announced this morning is the principal catalyst fueling the jump in XAU/USD. The emergency decision by FOMC officials to cut interest rates by 0.5% was unanimous and the first inter-meeting Fed rate cut in over a decade.

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A press statement from Fed Chair Powell published this past Friday, which detailed that “the coronavirus poses evolving risks to economic activity,” and how the central bank will “act as appropriate to support the economy,” primed markets for the latest FOMC rate cut.

CHART OF SPOT GOLD (XAU/USD) & TEN-YEAR TREASURY RATE (US10Y)

XAUUSD Price Chart Gold Forecast

Chart created by @RichDvorakFX with TradingView

Generally speaking, gold prices rise as interest rates fall. With the yield on US Treasuries sinking to all-time lows across various maturities, it likely comes as little surprise that spot gold price action is pressing 7-year highs.

XAU/USD spiked within arms-reach of the psychologically-significant $1,700 price level last week, but the breakout took a breather as investors assumedly raced to liquidate positions and raise cash for margin calls.

Learn More: How to Trade Gold – Top Trading Strategies & Tips

Gold price action now looks ripe with potential for further upside, however, and follows today’s confirmation that the Federal Reserve will capitulate to lofty FOMC rate cut expectations priced by markets.

GOLD PRICE CHART: 4-HOUR TIME FRAME (FEBRUARY 17 TO MARCH 03)

Gold Price Chart XAUUSD Forecast

Chart created by @RichDvorakFX with TradingView

Traders may continue inflating Fed rate cut bets if upcoming data releases indicate that economic impact from the coronavirus outbreak is worse-than-expected. This development would likely underscore recent strength exhibited by spot gold prices and widespread demand for safe-haven assets.

Gold price outlook thus continues to hinge on anticipated FOMC interest rate cuts as well as broader market sentiment surrounding the novel coronavirus (i.e. COVID-19) and its expected impact on global GDP growth.

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That said, the Fed could communicate that the emergency 0.5% interest rate cut just delivered is a one-and-done adjustment to counter economic fallout from the festering coronavirus outbreak.

This might cause XAU/USD to drift lower. On the contrary, spot gold stands to keep enjoying positive tailwinds from a prolongment of the global rate cut cycle amid rekindled recession risk.

Fed funds futures are still pricing another 30-bps of interest rate cuts by the next FOMC meeting scheduled for March 17-18 even after today’s 0.5% reduction. Looking further out the curve to December, interest rate traders are anticipating an additional 68-bps of easing from FOMC officials by year-end.

Keep Reading:Gold Forecast - Bullion Bid on Recession Risk, Inverted Yield Curve

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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