Gold Continues Decreasing, but the Long-Term Bullish Trend Persists
The gold (XAU/USD) price dropped by 1.8% on Monday as the US Treasury yields surged, while the US dollar (USD) continued to rise after the announcement of US tariffs fuelled fears of a global recession.
Optimism surrounding possible trade negotiations with US President Donald Trump fuelled a rebound in US Treasury yields on Monday. This pushed 10-year yields towards their largest daily increase in a year. Stronger US dollar and higher yields had a bearish impact on XAU/USD, which has been pressured lately by a broader market meltdown.
"We're getting a lot of stress in the gold market because of liquidity concerns and margin covering by speculators", said Bart Melek, head of commodity strategies at TD Securities.
Indeed, wider losses in the equity markets prompted traders to close their long positions in gold to meet margin calls elsewhere. Still, the long-term trend for XAU/USD remains bullish as the world remains gripped by the unfolding trade war, adding to general geopolitical and economic uncertainty.
"Gold retreats as investors turn to cash and other safe havens like the Swiss franc and the Japanese yen amid market turmoil, creating a risk of deeper corrections", said Nikos Tzabouras, senior market analyst at Tradu.com.
According to Reuters, money markets expect around 120 basis points worth of interest rate cuts by the US Federal Reserve (Fed) by December. The chance of a rate cut at the next Fed meeting in May stands at 37%. A non-yielding asset like gold will usually thrive in a low-interest environment.
XAU/USD rose during the Asian and early European trading sessions. The macroeconomic calendar is rather uneventful today, but news on possible trade deals and tariff relief may trigger additional volatility in XAU/USD.
"Spot gold may bounce to $3,049 per ounce, following the completion of a five-wave cycle from $3,168", said Reuters analyst Wang Tao.
Euro Drops on News About More Trade Tariffs
The euro (EUR/USD) lost 0.47% against the US dollar (USD) during Monday's volatile trading session.
Yesterday's trading session faced extreme volatility, with the intraday EUR/USD exchange rate fluctuating in a broad range of 1.08780–1.10500. Initially, the pair surged after news about US President Donald Trump considering a 90-day pause on tariffs. However, the White House officials quickly denied the report, sending EUR/USD lower again. Later that day, Trump warned about an additional 50% tariff on China if the country imposed its retaliatory tariffs. All these made traders even more bearish and prompted them to seek safe-haven currencies like the US dollar, the Swiss franc, and the Japanese yen.
"Because tariffs are thought to be hurting world growth, those currencies that seem to be more like risk-on currencies—the dollar bloc and the Scandies—they are underperforming. On the other hand, the currencies that are typically safe-haven currencies—like the Swiss franc and yen—are performing better", said Marc Chandler, chief market strategist at Bannockburn Global Forex.
According to Reuters, traders are watching for signs that large sovereign holders, including China, may be reducing their US debt holdings. If China were to accelerate the sale of US bonds, the US dollar would weaken, pushing EUR/USD higher. Meanwhile, in response to US tariffs, the European Commission proposed counter-tariffs of 25% on a range of US goods. At the same time, the European Commission leaves the door open for a possible deal. According to Reuters, officials offered a 'zero-for-zero' tariff deal to avert a trade war. EU ministers agreed to prioritise negotiations with the US while striking back with targeted countermeasures next week. Any negotiations progress will certainly help lift EUR/USD, but if the talks fail, the pair will likely fall sharply.
EUR/USD rose during the Asian and early European trading sessions. The economic calendar is relatively light today. Still, more news on possible trade deals and tariffs may trigger additional volatility in EUR/USD. Key levels to watch are resistance at 1.10500 and support at 1.08780.
GBP Plunges After More Tariffs Announcement
The British pound (GBP/USD) lost 1.33% against the US dollar (USD) on Monday due to a general risk-off sentiment. This prompted investors to seek the safety of USD and weakened riskier assets like GBP.
Although GBP and other major currencies have been weakening lately, it isn't clear if the greenback can continue to appreciate. Analysts have pointed out that the US dollar risks losing its safe-haven appeal as concerns about trade tariffs and their impact on US economic growth become more pronounced.
"Although we're getting erratic weakness in foreign currencies like the euro, sterling and even the Canadian dollar, the underlying trend here is the potential for losing faith in the US dollar as a reserve currency. If one has to consider the view one year out as opposed to one week out, it still seems like it's tilted towards a weak US dollar", said Thierry Albert Wizman, global FX and rates strategist at Macquarie.
Indeed, President Trump's tariff announcements triggered a dramatic market sell-off, erasing nearly $6 trillion from US stock valuations. Amidst this volatility, over 50 countries have reportedly sought trade negotiations with the White House. However, China responded with retaliatory measures, including imposing a 34% tariff on all US goods. Consequently, traders have significantly increased their expectations for Federal Reserve (Fed) rate cuts, anticipating a more aggressive monetary policy response to mitigate the potential economic fallout. At the same time, the Bank of England (BoE) is still expected to deliver only two rate cuts this year. Thus, the fundamental pressure on GBP/USD may turn bullish in the coming days and weeks.
GBP/USD rose during the Asian and early European trading sessions. The formal macroeconomic calendar is rather uneventful today, but news on possible trade deals or additional tariffs may trigger volatility in EUR/USD. Key levels to watch are resistance at 1.28000 and support at 1.27000.