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The tumultuous bygone week ending March 24 saw gold settling down with a loss of nearly 0.50% at $1978.61, while the US Dollar Index slipped around 0.55% to end the week at 103.11 as the 10-year US yields at 3.373% were approximately down 1.70% on the week.

2-year US yields closed around 2.2% lower at 3.766%.

Much awaited US FOMC monetary policy decision on March 22, which carried a lot of uncertainty regarding the possible FOMC rate and the bank’s forward guidance, was somewhat contrary to some market participants as the FOMC raised rates by 25 bps.

Some economists had called for a no hike in the wake of banking sector turmoil. Although the FOMC members did deliberate on a pause, too; however, the eventual rate hike amid banking worries did affirm that the US Federal Reserve, in line with its European counterparts, continues to remain vigilant against risks of elevated inflation.

However, despite the Fed hiking the benchmark rate, investors largely construed the FOMC presser as dovish on the Fed Chair Powell deviating from his usual remark of ‘ongoing rate increases’ to ‘some additional policy firming will be appropriate’.

The US Dollar tumbled despite the Fed not seeing a rate cut as its base case this year. The US treasury secretary Ms Yellen’s flip-flops on deposit insurance contributed to volatility in the financial markets, which was mirrored fully in gold moves, too.

Her comments didn’t do much to soothe the already frayed nerves of investors as they struggled to cope with the ongoing banking crisis. So far, the epicenter of the crisis has shifted back and forth between the US and Europe.Although the US macroeconomic data released during the week was pretty mixed as durable goods orders (February preliminary reading) disappointed, while preliminary S&P data of global US manufacturing (49.30 vs the forecast of 47; prior 47) , services (53.8 Vs the forecast of 50.30; prior 50.60) and composite (53.30 Vs 49.50; prior 50.10) PMIs
for March dispelled at least some of the gloom surrounding the US economy. That PMIs data weighed on gold Friday.

Investors’ focus shifted to Deutsche Bank on the last trading day of the week as its shares slumped 15% due to concerns regarding the banking industry amid a slowing economy.

The vicious selloff came after the bank announced a buyback of its debt, which usually is a sign of strength. Many prominent analysts called this selloff a result of irrational market behaviour as the bank doesn’t have any liquidity or counterparty risk issues per se.

With an unwavering focus on banking industry issues, traders are frantically fading off the possibility of any further rate hikes by the Fed this year as they see the Federal Reserve starting slashing interest rates starting June.

Markets expect the Fed to cut rates by a full percentage by the year end, contrary to the views of the central bank. Traders are paring back bets of European Central Bank rate hikes as well.

The huge disconnect between traders’ and central banks’ views on the future rate path amid elevated inflation and evolving banking crisis will keep the metal volatile.

It will serve well to acknowledge the fact that the markets have become quite edgy presently, as traders are shooting first and asking questions later.

In this scenario, gold volatility is here to stay, which also means that traders will continue to buy gold into the dips due to the unpredictable ebb and flow of risk sentiments concerning banking sector news.

Support for the yellow metal is at $1960, followed by $1930. Resistance comes in at $2010/$2030.

(The author is AVP, Fundamental currencies and Commodities analyst at Sharekhan by BNP Paribas)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

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