Marius Paun | London, UK | Senior dealer | Tuesday, 16th July 2019
US President Donald Trump tweeted that China and Europe are manipulating their currencies to compete with USA and not to be left behind, Bank of England Governor Mark Carney also talked down the pound sterling. Federal Reserve Chair Powell’s testimony to Congress was seen as dovish, suggesting an interest rate cut in the US later this month is a done deal. And that would happen amid full employment, solid economic growth of 3% per year and S&P 500 reaching an all time high above 3000. All leads to the suspicion of a return to a currency war?
Gold remained above $1400 mark as Bloomberg reported that central banks buying in 2019 is on track for 700 tons, which represents an increase of 73% compared with last year. The main reasons were slowdown in economic growth, geopolitical tensions and trade disputes as well as attempts to diversify reserves from fiat currencies.
China June Inflation data showed CPI at 2.7%, in line with expectations the lowest since August 2016, which could be problematic for industrial profits going forward.
In the US, FOMC June meeting minutes saw many Fed officials calling for a rate cut as a ‘cushion for shocks’ adding that inflation expectations were inconsistent with the 2% goal.
In UK, the pound fell below 1.25 to the dollar to a low of 1.2440, the weakest level since April 2017. The slump was based on the lingering Brexit uncertainty still weighing on the economy which is expected to contract in Q2, the first time in 7 years. UK Prime Minister contender Boris Johnson maintains that the country must be prepared to leave EU without a deal. On Friday GBPUSD rebounded slightly around 1.2550.
Meanwhile the former International Monetary Fund Chief Christine Lagarde is set to be confirmed as the new ECB President in October. At the same time European Commission warned of rising downside risks and downgraded the euro zone economic outlook in its latest forecast. ECB minutes also indicated a governing council agreeing on the need to prepare for policy easing. Despite that we can see EURUSD holding between 1.1240 to 1.1280 range.
Marius Paun | London, UK | Senior dealer | Friday, 28th June 2019
On the technical side
The news that made headlines for the past few weeks was Gold breaking above the $1350-1360 resistance area. The market had tried and tried to overcome that huge barrier for 6 years, forming a sideways range, which finally broke, pushing gold to within touching distance of the $1440 level.
It is worth remembering that $1430 was tested a few times back in 2013. It seems the market focused on those inflexion points. Hence it has proved a good ceiling this time around (for now?) as gold opened lower this week and is currently sitting around $1392. From a technical point of view that gap created by the lower opening ($1392) to Fridays close ($1408) is there to be filled, although it remains to be seen if/ when it will happen.
Additionally, $1390 represents support as it is a 38.2% Fibonacci retracement from an all time high of over $1900, back in Sep 2011, to the lows of $1046 seen in December 2015.
So whilst breaking out of the long term channel is definitely welcomed, the recent gains have been quite steep. For the Bulls in the market, a pullback could be the catalyst to give gold some breathing space on the RSIs and for future prospects, potentially allow room for the next leg up. We can see a target/resistance at $1480 – $1490 range, which represents 50% Fibonacci retracement, and then $1520-$1550 zone which was solid support between 2011-2013.
Any further retracements should find very healthy support back in the well-established $1350-1360 level, where the market found the resistance on the way up.
On the fundamental side
The bullish narrative
We feel that gold being back on the bullish map is very much dependent on a weaker US dollar because of the inverse correlation between the two.
Over the weekend US President Donald Trump and China’s Xi Jinping met at the G20 in Tokyo and it seems were back on speaking terms. On one hand Trump agreed not to introduce new tariffs on Chinese goods and allowed certain US companies to do business with telecoms group Huawei. On the other hand, China agreed to buy more agricultural goods which should help the struggling American farmers.
As it happens the political interests for both sides somehow aligned this time. Trump has an election coming next year and the ongoing warrior like attitude may not help, leading to expectation of him to tone it down a notch. President Xi has the Communist Party celebrations in October and because that’s the 70th anniversary since Mao founded the People’s Republic of China, will want to focus on prosperity, rather than tensions.
As a combination of the above, the rather positive meeting could spark renewed risk-on attitude with investors returning to stock market. Couple this with the anticipated interest rate cut by the Federal Reserve (which is overwhelmingly priced in) later this month, could push the US dollar lower. This potential scenario is probably what President Trump desires (higher stock market is good for election and lower dollar helps with paying down the deficit hid long term mantra).
It is for this very reason why this week’s non-farm payrolls report possibly has more significance than usual.
The bearish narrative
If, on the other hand, we have a strong reading from the non-farm payroll figures, that will soften the Fed’s hand in making the case for a rate cut, which in turn could scare off investors. Running back into the safe haven of the US dollar will become a distinct possibility which, at least in short term, might hurt gold prices.
This, combined with a rising stock market after the G20 meeting, might in itself be enough of a reason for Fed Chair Jerome Powell to hold fire for now and not start easing this month, especially when Trump has accused him of being wrong so many times. Forcing him to give in to pressure from the president and slashing rates on a rebounding stock market would raise questions on the Fed’s independence.