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.
It seems the US has reached an agreement with Mexico and President Donald Trump has now tweeted that tariffs would be suspended indefinitely. So much for ‘tariffs are a beautiful thing’ then… As a result, the greenback was given a lift, despite the weakest US employment report released less than 24 hours before. Later this month we could see the re-opening of negotiations between China and US at the G20 meeting, although it’s widely understood that a resolution of trade tensions between these two will require a lot more effort.
We saw a larger than anticipated trade surplus for China in May due to higher than expected exports (despite trade dispute escalation), coupled with lower than expected imports. At the same time, Chinese state-owned Bank of Communications International said ‘weakened valuation of the yuan is decided by the recent tough trade environment China is facing’ but added that they believe the yuan will drop below 7 within 3 months.
The race for the UK Prime Minister has seen the first round of voting which the clear favourite, Boris Johnson, has won by quite some margin after promising an income tax cut. He has already expressed his views that Brexit will happen on October 31 with or without a deal. However, despite previous concerns about a possible hard Brexit hurting the pound, cable (GBPUSD) was trading conditions were stable, around 1.2650, Friday morning.
Meanwhile, the ECB officials are starting to fear the market is losing confidence in the region inflation’s control which could force another round of stimulus to re-establish control. So much so that governing council member Olli Rehn said the central bank could strengthen forward guidance, cut interest rates and relaunch quantitative easing.
Australia’s (May) employment data release showed mixed signals, with an addition of 42.3k jobs (hugely above the expectation for 16k gain), while unemployment rate came in at 5.2% versus 5.1% prediction. Aussie dollar moved lower with many now seeing an increased chance for further easing in the coming months.
The US dollar started the week on the back foot following growing speculation that a rate cut is back
on the table at Federal Reserve. There is no end in sight for the trade dispute with China and its
increasing impact on global markets is definitely making investors nervous. The week ended with
disappointing non- farm payroll figures of 75K versus the expectation of 175k, which leads to the US
dollar expected to lose value further.
Replying to repetitive accusations against his country’s policies, China’s foreign ministry said that
every setback in trade talks is ‘due to US breaking consensus’. Amid stalling negotiations, it is unclear
if China will devalue its currency in retaliation to US tariffs or employ a more targeted approach i.e.
restrict exports of rare earths to the US (China accounts for more than 70% of global output).
Back in the UK on the Brexit front, Tory leadership contender Boris Johnson said if he gets in ‘we’ll
come out of Europe with a deal or no deal by 31 October’. The no deal option is causing a lot of
uncertainties within UK, which could possibly cause sterling to drop across the board.
European Commission reportedly has sent a letter to Italy blaming it for a violation of debt reduction
rules and is preparing to apply a $4 billion fine. Responding to this, Italian deputy prime minister
Luigi Di Maio commented the EU made ‘absurd’ requests on investments. Away from domestic
squabbles, economic fears spread as the European Central Bank signalled its readiness to embark on
a fresh round of bond purchases. So we have a dovish signals from both the ECB and the Fed, but the
euro is the currency currently coming out stronger breaking above 1.13 against the greenback.
In a move that was widely anticipated, the Reserve Bank of Australia’ cut cash rates by 25 basis
points from 1.5% to 1.25% at its latest monetary policy meeting on 4 June. That represents a record
low for Australia and is the first slash by the central bank since August 2016. The decision was taken
to support jobs growth, achieve inflation target as well as to deal with a weakening housing market.
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