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Market research and intelligence firm IIR: Middle Eastern oil refineries have reduced refining capacity by approximately 1.9 million barrels per day.On March 10th, Bank of America stated in a report that while the market currently views rising oil prices as a greater threat to inflation, supply shocks actually pose a risk to both sides of the Federal Reserves dual mandate. The report points out that monetary policy tends to tighten only when consumer demand is strong enough and economic activity can withstand supply shocks, allowing the Fed to focus on inflation as it did during the 2022 Russia-Ukraine conflict. However, the bank notes that at that time, economic demand was significantly stronger (unemployment rate at 4%, core PCE inflation exceeding 5%, non-farm payrolls increasing by 500,000 per month, and consumers still having substantial stimulus funds). Currently, job growth is slower, inflation is moderately high, and fiscal stimulus is more limited. The bank believes that if the oil price shock persists, it will create conditions for the Fed to implement a more accommodative monetary policy.Iraq says it is trying to resume Kirkuk crude oil shipments, and Iraq’s daily oil production has fallen to 1.2 million barrels.Market news: U.S. Senate Democrats warned that Treasury Secretary Bessenters term as acting IRS commissioner has expired.On March 10th, Morgan Stanleys Bruna Skarica stated in a report that the Bank of England may cut interest rates in April if global energy supply disruptions are resolved in the near future. The Middle East war and rising energy prices have reignited inflation concerns, leading to lower market expectations for a March rate cut by the Bank of England. LSEG data shows that the money market currently prices in a 15% probability of a March rate cut and a 36% probability of a rate cut in April. Morgan Stanley previously predicted rate cuts in March, July, and November, but has now revised its forecast to April, November, and February of the following year, provided that energy supply disruptions are not prolonged.

The XAU/USD pair attempts to regain $1,730 prior to Fed Chair Powell's address

Alina Haynes

Sep 08, 2022 16:58

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Gold price (XAU/USD) gains bids to reestablish intraday high at $1,718 as the US dollar retreats ahead of Thursday's big events. In doing so, the yellow metal extends yesterday's recovery from the one-week low amid weaker yields and a mixed risk profile.

 

US 10-year Treasury yields extend Wednesday's fall from the highest levels since mid-June to 3.23%, which weighs on the US Dollar Index (DXY), which retreats to 109.50, extending yesterday's losses from the 20-year high.

 

The recent decline in yields may be attributable to the market's rush into bonds prior to the crucial European Central Bank (ECB) Monetary Policy Meeting and Fed Chair Jerome Powell's speech. However, rumors about Japan's probable involvement to preserve the home currency via the bond market appear to have depressed yields.

 

Due to Beijing's role as one of the world's largest gold buyers, contradictory news from China should have also contributed to the XAU/USD's comeback.

 

Three persons with knowledge of the situation were cited by Reuters when they reported encouraging news for China's property sector. Reuters said that "Zhengzhou pledged to restart all halted housing projects within 30 days by utilizing special financing, requiring developers to refund misused funds, and encouraging certain real estate businesses to file for bankruptcy."

 

Nonetheless, the risk-negative news regarding covid and Taiwan appeared to impose downward pressure on metal prices. The South China Morning Post (SCMP) previously reported, "Shenzhen lowers Hong Kong visitors' admission quota." Reuters' report that Taiwan and the United States are preparing for closer ties further dampens the mood.

 

While reflecting market sentiment, S&P 500 Futures post modest gains, whilst Asia-Pacific equities remain divided.

 

In conclusion, the ECB's 75 bps rate hike can limit a short-term decline in the XAU/USD before a new decline, if Powell sounds hawkish. As the ECB's ability to tighten monetary policy is restricted compared to the Fed's, the gold price is likely to remain in the bears' sights. Also, economic concerns originating from Europe are not ruled out, giving gold bears cause for optimism.


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