(Kitco News) Gold's bullish momentum has run out of steam as market expectations shift towards a more hawkish Federal Reserve in the second quarter, according to Australia and New Zealand Banking Group (ANZ). The short-term risk for gold is a drop below $1,800 an ounce.
"Recent repricing of market expectations around the Fed tightening could create a short-term headwind for prices," ANZ's strategists Daniel Hynes and Soni Kumari said in a note Monday. "A strong labour market could see further surprises on inflation and urge the Fed toward a more hawkish stance."
The key U.S. macro report from this week showed that inflation moderated in January, but the pace of easing could have been more dramatic. The annual consumer price index (CPI) climbed 6.4% last month versus the expected 6.2%. This is still down from December's pace of 6.5%.
Following the inflation report, markets began to price in a 94% chance of a 25-basis-point hike in March, an 80% chance of another 25 bps hike in May, and a 52% chance of an additional 25 bps hike in June, according to the CME FedWatch Tool.
"We expect gold to experience short-term volatility as the market's rates expectations diverge from the Fed's outlook. Unemployment is historically low, and inflation is persisting above the Fed's target range. This could keep the Fed hawkish," Hynes and Kumari said.
The U.S. dollar will remain a central driver for gold this year. When the greenback weakened at the beginning of the year, gold rallied. But after the strong jobs report from January, the U.S. dollar strengthened, which has weighed on gold. Yet, this latest trend is likely a temporary one.
"Even though the Fed's monetary policy will be a key driver for the USD, the greenback will also be influenced by the outperformance of Europe and other regions against the U.S. and narrowing rate differentials. So, the USD is likely to remain on a downward trajectory for the rest of the year," the strategists said.
ANZ's gold's year-end price target remains at $1,900 an ounce. The bank projects more gains for the precious metal in the second half of the year.
"The mature phase of the hiking cycle shouldn't lead to interest rate hikes at the pace seen in 2022. This should keep the DXY well below last year's high. The 'fear factors' driving haven flows into the USD last year have also diminished. This makes us believe that a structural decline in the greenback is on the cards, which should support gold," the bank's note said.
In the short-term, gold can drop below $1,800 an ounce from a technical perspective. "A further selloff could confirm prices falling below USD1,800/oz in the short term," Hynes and Kumari added.
After rallying to $1,960 an ounce and reaching nine-month highs on expectations that the Fed will ease its tightening cycle, gold saw a sharp correction lower.
"While this correction looks normal after a 20% price rally, the bullishness seems to be waning. The recent correction has broken the trendline support of the rising wedge formation. Further fall in gold prices could trigger more technical selloffs in the short term," the strategists said. "The key supports are USD1,800/oz and USD1,730/oz. On the upside, immediate resistance lies at USD1,900/oz. Should the price break above USD1,930, it would confirm the continuation of the uptrend."
De-dollarization trend
One supporting driver going forward will continue to be central bank buying, with the official gold buying soaring to 1,136t in 2022, the highest level on record. "Elevated geopolitical risks, currency devaluations and credit defaults have all been motivating factors in central banks' desires to diversify their foreign reserves," the bank's note said.
Also, a new dominating trend is developing - to settle trades in currencies other than the U.S. dollar, Hynes and Kumari noted. And many of the sanctioned countries are looking to settle trades in gold.
"Russia and Iran are planning to issue stablecoin, backed by gold, to settle trades. Emerging markets - Turkey, China, Egypt, Qatar, UAE and India - were the top gold buyers in 2022," the strategists elaborated. "We suspect the unreported gold purchases could have come from Russia, China and the Middle East. Russia's central bank has stopped reporting its gold reserve changes but is buying from its miners, following western embargoes."
