After a brief pause on Tuesday, gold resumed its price growth, taking advantage of a surge in demand for safe-haven assets on the global financial market. Just in a week, the main precious metal has managed to win back more than 80% of the losses incurred during February. Such a sharp rise could not but cause technical indicators to quickly move into the overbought zone. In their turn, long upper shadows of the latest candlesticks on the daily chart also indicate for the growing number of those who would like to fix their profits.
The collapse of several large banks in the U.S. and the problems of the Credit Suisse bank have increased concerns about the crisis spreading to other sectors of the economy. Despite the intervention of financial regulators and mass panic being prevented, markets are still under pressure. Investors are hoping that central banks will now refrain from further interest rate hikes, but nothing like that has happened yet.
Yesterday, the ECB increased the interest rates by another 0.5% in accordance with its earlier promises despite the remaining risks of financial instability. Perhaps there is a psychological game at play here: if the ECB limited itself to a minimum rate hike of 0.25% or did not change it at all, it would essentially confirm the severity of banking sector problems and could only increase market volatility. And the ECB is building confidence in its policy by following the plan, although higher and higher rates are clearly not going to please European banks.
So, now all that's left to do is to wait for the Fed's actions at the meeting scheduled for March 22. If the U.S. regulator pulls the same stunt as its European colleagues (i.e. continues to hike interest rates), the market may quickly become disappointed in its current projections, according to which the Fed is supposed to start easing its monetary policy this summer. A crushing of such hopes could cause a significant correction in gold prices.
The main downside targets for gold prices will be the levels of 1915 and 1900, and the direction of further movement will become clear after an outcome of the Fed meeting is announced.
The following trading strategy may be suggested:
Sell gold in the range of 1930–1940. Take profit 1 – 1915. Take profit 2 – 1900. Stop loss – 1950.
This content is for informational purposes only and is not intended to be investing advice.
