Investors fly to safety

Safe-haven gold and Treasuries rallied as Ukraine’s tension increased. At the same time, US stock futures fell, though the lack of clarity around the situation limited more significant moves. 

The US dollar didn’t lift up against all major currencies in the European session Thursday despite hawkish FOMC minutes and good US data. The Federal Reserve is on track to raise interest rates in March, especially after the 3.8% jump in retail sales last month.

Gold at three-month peak

The mounting threat of tension between Russia and the West due to the escalating conflict with Donbas separatists has frightened investors, prompting a flight to safety, boosting gold demand. Combined with subdued risk sentiment, a softer dollar and lower yields helped keep gold near an eight-month high.

The price of gold has been moving higher after Wednesday’s impressive recovery from the $1,850 level, with the price now challenging the three-month highs at $1,880 as a result of a sudden risk-aversion wave that shaken off the markets. 

FOMC minutes as hawkish as expected

Gold also finds support from Wednesday’s minutes from the FOMC meeting. It sounds less hawkish to those betting on the 50 basis point hike in March, but the broader picture is almost unchanged.

Pricing on the Fed funds front has flipped, favouring a 25-bp hike rather than a 50-bp hike in March. Last night, the probability of a 25-bp hike in US sovereign bonds rose from nearly 40% to above 60%.

The latest minutes showed that the central bank would raise interest rates imminently and continue to monitor inflation levels. Minutes also indicated that officials hadn’t decided on a particular pace for rate hikes. 

Additionally, the FOMC minutes reveal how the Fed plans to shrink its roughly $9 trillion balance sheet exposure. According to the FOMC minutes, the reduction in bond purchases is expected to conclude in March. However, many FOMC members believe that the Fed should end its bond-buying programme sooner so as to demonstrate the Fed’s commitment to inflation management.

Events of the day

Federal Reserve Bank of St. Louis President James Bullard speaks on Thursday. US jobless claims and the Philadelphia Fed manufacturing survey are also due.

Also, ahead on Thursday, speeches from Bank of Spain governor Pablo Hernández de Cos and European Central Bank (ECB) chief economist Philip Lane will be closely watched for clues on the ECB outlook.