Gold Forecast For Today: The Gold prices (yellow metal) is facing static resistance at $1,855. A dovish Fed should lift Gold above that level and open the door for an extendedrally toward $1,877, where the October-December uptrend ended.
Gold Technical Support
“On the flip side, $1,827 (Fibonacci 23.6% retracement) aligns as first technical support. With a daily close below that level on a hawkish Fed policy outlook, gold could slidetoward $1,810 (Fibonacci 38.2% retracement, 100-day SMA) and $1,804 (200-day SMA).”
|Gold price is treading waters below $1,855 amid mixed market sentiment.|
|The Fed is likely to stand pat, may hint at a March lift-off, balance sheet reduction.|
|Death cross confirmation keeps doors open for a correction in gold price.|
Gold price witnessed another bullish day on Tuesday, as it built on the previous rebound and broke through the critical psychological barrier at $1,855. A sharp correction in the US dollar against its main competitors from threeweek highs served as a key catalystbehind gold’s additional upside. A sudden turnaround in the risk sentiment in the European trading, as investors looked past the Russia-Ukraine crisis to earnings reports, weighed on the dollar’s safe-haven demand and boosted gold price.
Fed Interest Rate Decision
The retreat in the US Treasury yields also helped the bright metal to gain further ground, as investors preferred safety in the US Treasuries ahead of the US Federal Reserve’s (Fed) interest rate decision due on Wednesday. Bulls, however, failed to sustain above $1,855 and pull back towards the close, as the US tech sell-off resumed on the Fed rate hike concerns.
Gold price is treading water below $1,855 heading into the Fed showdown this Wednesday. The US dollar is in a downside consolidative mode alongside the yields, as traders brace to gauge the Fed’s hawkishness. The world’s most powerful central bank is set to hint at a March rate hike while expressing its concerns over inflation. Investors will closely watch for anysignal on the timing of the balance sheet reduction, which could offer a hawkish surprise to markets. On any hawkish pivot from the Fed, the yields and the greenback could catch a fresh bid wave, which will likely trigger a correction in gold price. The hawkish Fed outlook could exacerbate the pain on WallStreet, boding well for the dollar.
Rising Wedge Formation
Gold’s upside remains capped by the upper boundary of a month-long rising wedge formation, now pegged at $1,855.
Rejection at that level could prompt a corrective pullback in gold price towards Tuesday’s low of $1,835.
Should the downside gather traction, then bears will target the recent range lows around $1,827.
The 14-Relative Strength Index (RSI) has edged slightly lower, which implies weakening bullish momentum.
The 200-Daily Moving Average (DMA) crossed the 50-DMA for the upside on a daily closing basis, validating a death cross and adding credence to a potential leg down in gold price.
If The Fed Fails
If the Fed fails to cheer the hawks, then gold bulls will gain a fresh life, triggering a fresh upswing for a retest of two-month highs of $1,855.
This will confirm an upside breakout from a rising wedge formation, defying the bearish odds, with a rally towards $1,860 in the offing.
Topic: Gold Forecast For Today
For emerging economies, the balance prospects/risks has been deteriorating since end-2021. For 2022, a bigger than expected growth slowdown is very likely, sometimes with social instability as already seen in Kazakhstan. Over the last three months, Turkey has experienced a mini financial crisis again. Monetary and exchange rate policy is betting on exports and investment to support growth and rebuild the major economic balances over the medium term, albeit at the price of short-term financial instability. This is a daring gamble that could force the authorities to introduce genuine foreign exchange controls instead of the incentive measures they have implemented so far.
Threats to growth in emerging economies increased at the end of 2021 with the economic slowdown and the real estate sector crisis in China, the widespread acceleration in inflation over commodity price effects and the extension of monetary policy tightening, non-resident investment outflows from domestic bond markets (China excepted), geopolitical tensions, and the emergence of new waves of Covid-19 infection with the Omicron variant. In 2022, therefore, economic growth will very likely slow more than expected. There are also risks of social unrest such as was seen recently in Kazakhstan.
The risks of the new economic policy
This financial instability is a by-product of the authorities’ strategy, which is to support growth through exports, thanks to a weak currency, and stimulate investment through a deliberate relaxation of monetary policy to support domestic lending (the TCMB’s main policy rate has been cut from 19% in September to 14%, leading to significantly negative real interest rates). By boosting competitiveness, authorities expect to foster the current account balance and to stabilize the exchange rate, indirectly reducing inflation. In the meantime, liquidity support from Gulf States would be a possible option to foster forex reserves.
However, this strategy carries a number of risks. As inflation accelerates, household confidence has historically fallen, despite measures adopted to offset the loss of purchasing power (such as the exceptional 50% increase in the minimum wage on 1 January, which will be likely followed by a further increase in the second half).
True, the impact of currency depreciation on the current account is significant: between 0.5 and 1 point of GDP of improvement in the underlying current account balance (i.e. excluding energy and gold) for a depreciation of the real exchange rate of 10%. But any gains would be largely offset by the increased price for net energy imports (5% of GDP in 2021) and net imports of gold, which act as a hedge against inflation. Above all, maintaining gains in currency competitiveness in real terms will require recurrent TRL depreciations.
Balance sheet impact of the depreciation
Currency depreciation also affects the balance sheets of banks and corporates
The direct exchange rate risk for banks is limited, as they have to balance their on-balance sheet debtor position with an off-balance-sheet creditor position, mainly through currency swaps. Moreover, the counterparties to these swaps have changed; since the end of 2019, non-residents have withdrawn (from the offshore market) and the central bank has filled the gap. As a result, banks’ off-balance sheet positions are deemed to be more stable. Moreover, foreign currency bank deposits from residents and non-residents (USD 261 billion at the beginning of January) are 37% covered by foreign currencies in blocked accounts and the value of currency swaps with the TCMB (USD 96 billion in total).
However, the foreign-currency exposure of corporates is substantially negative (of about USD 166 billion in October 2021). The debt ratios of exporting companies (i.e. external debt including import financing loans to revenue from exports of goods and services) has trended upwards over the past decade and now stands at 93%. This is a matter of concern even if there are some risk-mitigating factors (at least in the ST); corporates’ short-term foreign currency position is positive (USD 63 billion) thanks in particular to the high level of deposit dollarization (66%). The rollover rate of medium and long-term loans was still above 100% up to November. Lastly, domestic debt denominated in foreign currency has been stable at around 20% of GDP since 2015.
The government’s exposure to currency risk is also very high, with foreign-currency debt accounting for two-thirds of its total debt. Fortunately, total government debt remains modest at 40% of GDP.
In summary, the Turkish authorities’ strategy is based largely on winning export market shares as the main engine of growth (as a matter of fact, exports of goods increased by 30% in dollar terms in 2021, around twice the average growth for the main countries of Central Europe).
But this strategy will also need corporates to invest and households to maintain consumption levels. Strongly negative real interest rates and indexation measures are expected to help them. But President Erdogan is also appealing to the population’s sense of economic patriotism. In economic terms, this strategy is an uncertain bet on an adjustment through flows (mainly exports), whilst the analysis of stocks (forex reserves, foreign-currency debt of corporates and the government, bank deposit dollarization) highlights potential risks. The fear is that this adjustment may lead to a temporary recession or genuine foreign exchange controls and thus be more a constraint than a choice.
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