Gold Strengthens Due to Implementation of US Trade Tariffs
The gold (XAU/USD) price rose by 0.82% as the US dollar (USD) continued to weaken amid escalating trade conflicts following US President Donald Trump's new tariffs.
"The implementation of tariffs brings a high level of uncertainty to the markets, and safe-haven products like gold and silver continue to do well. The US dollar has been under pressure against some of the other major currencies, so that has been supportive as well", said David Meger, director of metals trading at High Ridge Futures.
Indeed, because gold holds its value during economic and geopolitical turbulence, its appeal increases when global recession risks rise. At the same time, a weaker US dollar makes gold cheaper for holders of other currencies.
Yesterday, Trump's new 25% tariffs on imports from Mexico and Canada took effect. He also doubled duties on Chinese goods to 20%. China hit back immediately with an additional 10–15% tariffs on certain US imports taking effect on 10 March and a series of export restrictions for designated US entities. Canada retaliated with 25% tariffs on C$30 billion worth of US imports. These tariffs are feared to ignite a full-blown trade war, a scenario that makes investors highly nervous.
XAU/USD was relatively unchanged during the Asian and early European trading sessions. Today, traders focus on the ADP Employment report at 1:15 p.m. UTC for clues on the Federal Reserve's interest-rate trajectory. Higher-than-expected figures may temporarily pause the bullish trend in XAU/USD but are unlikely to reverse it. Lower-than-expected results will likely push the pair above $2,930.
"Spot gold may test support at $2,894 per ounce, a break below could open the way toward the $2,861 to $2,879 range", said Reuters analyst Wang Tao.
Euro Grows as Russia-Ukraine Peace Talks Seem to Advance
The euro (EUR/USD) rallied sharply against the US dollar (USD) on Tuesday, setting a new three-month high on the prospect of a peace deal between Russia and Ukraine.
Reuters reported that US President Donald Trump's administration and Ukraine plan to sign a minerals deal, potentially leading towards a peace settlement between Russia and Ukraine. Conflict in Eastern Europe has long been a major destabilising factor for the eurozone, so the news on possible conflict resolution positively affects EUR/USD. Meanwhile, German political parties agreed to set up a €500 billion fund for infrastructure and overhaul borrowing rules to increase defence spending. The news additionally supported the euro in the short term.
However, the threat of a global trade war is weighing on the euro. Donald Trump's new 25% tariffs on imports from Mexico and Canada and 20% duties on Chinese goods took effect on Tuesday, sparking fears of higher inflation and global recession. In response, China and Canada retaliated with their own set of tariffs on a range of US goods, with Mexico expected to respond on Sunday. John Williams, the president of the Federal Reserve (Fed) Bank of New York, said that the US tariffs will likely drive inflation higher. Still, he believes the current interest rate policy is appropriate and doesn't need changes. Meanwhile, investors expect the European Central Bank (ECB) to cut the rates at least twice this year. The interest rate differential between the ECB and the Federal Reserve is a major bearish factor for EUR/USD.
EUR/USD fell during the Asian session but started to rise during the early European sessions. Today, the main focus is on the US macroeconomic reports: ADP Employment at 1:15 p.m. UTC and ISM Services Purchasing Managers' Index (PMI) at 3:00 p.m. UTC. Stronger-than-expected figures may provoke a downward correction in EUR/USD. Conversely, weaker-than-expected results may pull the pair towards 1.06500.
British Pound Climbs Higher as USD Weakens
The British pound (GBP/USD) gained 0.75% against the US dollar (USD) on Tuesday as the greenback weakened amid fears that a global trade war will damage the US economy.
GBP/USD has been rising steadily since mid-January. This upward trajectory, initially perceived as a correction, has evolved into a more sustained rally. The rise shows a growing optimism regarding the U.K.'s economic outlook and a shift in investors' perceptions of GBP. This steady climb can be attributed to improving U.K. economic data, which exceeded some analysts' estimates, notably, retail sales and consumer sentiment.
However, the rally is also the result of USD weakness as investors have already priced all the bullish factors for the greenback and started to close their long positions. According to interest rate swaps market data, investors expect the Bank of England (BoE) to make only one rate cut this year and the same number of reductions from the Federal Reserve. Thus, there's no apparent divergence in monetary policy expectations between the BoE and the Fed. Without any fundamental impulses, GBP/USD may continue to move higher.
GBP/USD was virtually unchanged during the Asian and early European trading sessions. Today, the main focus is on the US macroeconomic reports: ADP Employment at 1:15 p.m. UTC and ISM Services Purchasing Managers' Index (PMI) at 3:00 p.m. UTC. Stronger-than-expected figures may provoke a downward correction in GBP/USD. Conversely, weaker-than-expected results may pull the pair towards 1.28400.