Gold (XAU/USD) jumped 1.34% on Tuesday as safe-haven demand increased amid uncertainty about US President Donald Trump's potential trade tariffs.
Yesterday, XAU/USD broke above the important $2,720 level and reached a two-month high. Investors rushed in to buy gold, feeling uneasy about the future of the global economy in case Trump's administration implements new trade restrictions.
"Today's move has largely been about the threat of US blanket tariffs following Trump's inauguration. The information with respect to potential tariffs has only come in at a trickle", said Daniel Ghali, commodity strategist at TD Securities.
Yesterday, Trump hinted that the administration may introduce import duties on Canadian and Mexican goods on 1 February. Furthermore, investors remember that during the first year of Trump's first administration in 2017, the gold price rose by 13%, which was its best annual performance in seven years. Trump's proposed policies are largely considered inflationary, potentially prompting the Federal Reserve (Fed) to maintain higher interest rates for an extended period to control inflation.
XAU/USD was rising during the Asian and early European trading sessions. Today, the economic calendar is rather uneventful. However, several central bankers will be giving speeches during the World Economic Forum in Davos, so the market may experience unexpected volatility. It may particularly affect interest-rate-sensitive assets like gold as investors will react to officials' commentary on monetary policy and the global economic outlook.
"Spot gold may retrace into a range of $2,719 to $2,728 per ounce, as suggested by its wave pattern and the bearish divergence on the hourly RSI", said Reuters analyst Wang Tao.
Euro Remains Oversold
The euro (EUR/USD) gained 0.14% against the US dollar (USD) during a rather choppy trading session on Tuesday as markets faced the uncertainty surrounding tariffs President Donald Trump may implement.
"Volatility is clearly back in a big way, and after the relatively calm term of Joe Biden, FX markets are on a hair trigger for any tariff talk from the Trump administration", said Helen Given, FX trader at Monex USA.
However, any new changes in the US trade policy will likely be implemented only gradually. Although Trump highlighted the possibility of a universal tariff introduction, he also said that the US wasn't ready for it yet. Meanwhile, other officials said that new taxes would be imposed in a measured way. The eurozone is the US's major trade partner, and its currency is highly sensitive to any changes in trade relations. New tariffs can significantly impact export volumes and economic growth within the eurozone, subsequently affecting the euro's value.
"What you're seeing here, too, is just how crowded long dollar positioning is. All you need is some ambiguity on the tariff front, and you get these kinds of moves", said Erik Bregar, director of FX & precious metals risk management at Silver Gold Bull.
According to the latest CFTC Commitment of Traders Report, the euro is one of the most oversold currencies among the majors. As of 14 January, large speculators were holding 225,000 net-short contracts in euro futures, an almost two-year record. Therefore, EUR/USD may potentially rebound soon as there are currently too many short positions that may be closed at any moment.
EUR/USD was relatively flat during the Asian and early European trading sessions. Today, the formal macroeconomic calendar is rather uneventful. However, Christine Lagarde, the president of the European Central Bank, will give a speech at the World Economic Forum at 3:15 p.m. UTC. Hawkish remarks will probably push EUR/USD higher, possibly above 1.04580. Conversely, a dovish tone may bring EUR/USD down towards the major support level at 1.03550.
Australian Dollar Is Under Bearish Pressure
The Australian dollar (AUD/USD) lost 0.05% against the US dollar (USD) during Tuesday's very volatile trading session.
Initially, AUD/USD declined towards the 0.62000 level but later recouped all the losses and finished the day essentially unchanged. Like other currencies, AUD is under pressure due to the uncertainty surrounding US President Donald Trump's potential trade tariffs. While Trump didn't mention Australian goods as a target for his new trade restrictions, the implementation of a universal tariff may affect AUD/USD.
Fundamentally, a downward pressure on AUD/USD also stems from the divergence in monetary policy expectations between the Reserve Bank of Australia (RBA) and the Federal Reserve (Fed). Cooling underlying inflation in Australia has increased the chances of RBA cutting interest rates next month. According to Reuters, traders currently see a 78% probability of a 25-basis-point rate reduction at the February meeting.
AUD/USD was falling during the Asian and early European trading sessions. Today, the economic calendar is rather uneventful. Still, traders should monitor a number of central bankers' speeches at the World Economic Forum in Davos. Some unexpected volatility could affect markets, particularly risk-sensitive currencies like AUD.