Gold Rockest on Persisting Trade War Fears
The gold ( XAU/USD ) price rallied by 1% on Tuesday as the US dollar (USD) continued to retreat from its multi-month high, while safe-haven flows remained elected due to trade tensions between the US and China.
China retaliated with its own tariffs on US exports in response to President Donald Trump's tariffs on China, and investors sold off the US dollar and flocked into safe-haven assets, like gold and silver.
"The tariff news came out like it did overnight—I think right now that's the main driver. The dollar was strong going into the week here, but with a lower dollar, that also definitely helps the price of gold", said Bob Haberkorn, senior market strategist at RJO Futures.
The combination of geopolitical uncertainty and weaker greenback, which makes gold less expensive for holders of other currencies, pulled XAU/USD to a fresh multi-year high. The pair is now less than $200 away from a major $3,000 mark. Escalating global trade tensions, especially between the world's two largest economies, damages investors' risk sentiment because it creates a general sense of unease and fuels inflation fears. One Federal Reserve (Fed) official warned on Monday that uncertainty over the price outlook calls for slower interest rate cuts.
XAU/USD was rising during the Asian and early European trading sessions. US President Donald Trump said he wasn't hurrying to speak to Chinese President Xi Jinping to defuse the existing trade tensions. The continuing rally in gold is probably a reaction to his comments. Today, traders should monitor any new developments around tariffs. In addition, several US macrocosmic reports will likely trigger increased volatility. ADP Nonfarm Employment report is due at 1:15 p.m. UTC, and the ISM Services report is due at 3:00 p.m. UTC. Worse-than-expected results will likely pull XAU/USD higher towards $2,870. Conversely, better-than-expected figures may temporarily pause the rally and trigger a pullback towards $2,845.
Euro Gains, but Its Prospects Remain Bleak
The euro ( EUR/USD ) gained 0.32% against the US dollar (USD) on Tuesday as investors covered their bullish bets in the US Dollar Index (DXY) in reaction to escalating trade tensions between the US and China.
Although US President Donald Trump suspended his threat of steep tariffs on Mexico and Canada, the tariffs on China remained in place. Thus, the country hit back with its own tariffs on US exports. Therefore, even as trade tensions eased in one place, they escalated in another, keeping investors on edge and contributing to market volatility.
Yesterday's recovery in EUR/USD was mostly the result of the weakness in the US dollar. Overall, the long-term outlook for the eurozone economy remains murky as it may soon become the next target of Trump's tariffs. Furthermore, investors still expect the European Central Bank (ECB) to pursue a more dovish monetary policy than the Federal Reserve (Fed). Interest rate swaps market data currently implies about 75 basis points worth of rate cuts by the ECB by the end of 2024 compared to just 25 bps of cuts from the Fed.
EUR/USD was flat during the Asian and early European trading sessions. Today, traders should monitor any new developments around potential trade negations between the US and China. Also, two US macrocosmic reports will likely trigger more volatility: ADP Nonfarm Employment at 1:15 p.m. UTC and ISM Services at 3:00 p.m. UTC. Worse-than-expected results will likely push EUR/USD up towards 1.04130. Conversely, better-than-expected figures may temporarily pause the rally and trigger a downward movement towards 1.03450.
GBP Traders Await Interest Rate Decision
The British pound ( GBP/USD ) gained 0.23% against the US dollar (USD) on Tuesday as the greenback weakened following China's decision to impose import tariffs on US goods.
The escalation in the US–China trade war is a long-term bearish factor for GBP as tariffs are expected to push up US inflation, supporting the US dollar by keeping US interest rates higher for longer.
"We're still looking at these 10% tariffs on China and China's retaliation, which is going to add some risk premium back into the market. We'll see if there's any sort of negotiation on the back end that might tamp these down, as we saw with Mexico and Canada. But as it looks right now, the trade war with China is back up and running", said Helen Given, FX trader at Monex USA.
GBP/USD was flat during the Asian and early European trading sessions. Traders should monitor any new developments around potential trade negations between the US and China. Also, US macrocosmic reports will likely trigger more volatility: ADP Nonfarm Employment at 1:15 p.m. UTC and ISM Services at 3:00 p.m. UTC. Worse-than-expected results will likely pull GDPUSD up towards 1.25200. Conversely, better-than-expected figures may temporarily pause the rally and trigger a drop towards 1.24250.
Traders may refrain from initiating large positions in GBP pairs today ahead of the Bank of England's (BOE) interest rate decision, due at 12:00 p.m. UTC tomorrow. Traders expect the bank to cut its base rate by 25 basis points towards 4.5%. However, the most important will be the Monetary Policy Report and Monetary Policy Statement and officials' comments during the press conference. If the BOE downgrades its economic forecast and Governor Andrew Bailey hints at more rate cuts, GBP/USD will decline. If the statement includes better economic assessments and Bailey makes hawkish remarks, GBP/USD may rise significantly.