Brokers' notes: Gold prices hold steady

Gold

Gold prices held steady on Wednesday, off a three-month low hit in the previous session supported by strong physical demand in Asia, as investors await the US Federal reserve's rate decision and more economic data for direction.

Holdings in the SPDR Gold Trust suffered its largest one-day loss, down 31.262 tonnes to an eight-month low of 1,229.581 tonnes, as safe-haven demand from investors diminishes at wake of improved economic data.

US consumer confidence rose in January to its highest level in eight months, underscoring the brightening economic outlook, although declining housing prices still cast a cloud on the recovery. In addition, the Fed began a two-day meeting on Tuesday that is expected to end with a nod to an improved economic outlook but no change in course on its $600 billion bond-buying plan.

US dollar

The US dollar held near a 10-week low against a basket of currencies on Wednesday, with the market looking for confirmation from the Federal Reserve later in the day that its focus remains on supporting growth.

The perception that the Fed will keep a much easier policy than the European Central Bank, which is growing worried about inflation, has helped the euro to extend its recovery after a two-month drubbing from worries over euro zone debt.

The US dollar extended losses for a fourth day, after US bond yields fell on news of President Barack Obama's proposal to freeze portions of federal spending in his State of Union address. The US dollar index against a basket of major currencies stood at 77.925, just a hair above a 10-week low of 77.814 hit earlier in the week.

Other currencies

In the interest rate swap market, the spread between two-year rates in the two currencies jumped to 110 basis points approaching a two year high and up sharply from 73 basis points just three weeks ago.

The euro also benefited from strong demand for the inaugural bonds from Europe's financial rescue fund on Tuesday. Asian investors, including the Japanese government, took up more than one-third of the 5 billion euro ($6.84 billion) offer, although the Japanese government has said it would use euro cash in its foreign currency reserves to buy the bonds.

The euro stood at $1.3685 near a two-month high of $1.3705 hit on Tuesday and within sight of a 61.8 percent retracement of its November-January fall, around $1.3740. Beyond that, its Nov. 22 high of $1.3786 is seen as a major target.

British pound

The British pound extended losses after a surprising contraction in the UK economy in the fourth quarter prompted investors to scale back expectations of a rate hike by the Bank of England. The pound dipped 0.1 percent against the US dollar to $1.5810 It had fallen as low as $1.5750 on Tuesday. Against the resurgent euro, the pound was near a 2-1/2-month low of 0.86695 per euro hit on Tuesday.

Oil

Oil rose on Wednesday in a technical rebound ahead of a statement from the US Federal Reserve expected to reaffirm an improved economic outlook for the world's largest oil consumer while investors await weekly stocks data.

The dollar held near a 10-week low against a basket of currencies as the Fed is expected to stay the course on its $600 billion bond-buying plan. Brent's premium to US benchmark West Texas Intermediate crude remained wide at around $9 a barrel. Brent will probably stay supported on lower crude inventories in Europe and as investors prefer to put their money in the European price marker over WTI.

This would keep the price spread between the two oil price markers wide. US crude stocks rose by 2.1 million barrels last week, or more than expected as imports increased, industry data from the American Petroleum Institute (API) showed on Tuesday. Distillate stocks fell a whopping 5.0 million barrels and gasoline supplies rose 1.7 million barrels, the API said. Government data due at 1530 GMT on Wednesday could be bearish.

Source: Richcomm Global Services, DMCC, Dubai; www.richcommglobal.com