Gold Rallies on Fresh Trade Tariffs
Weekly Metals Wrap
The yellow metal was initially suffering a disappointing session this week. Gold racked up a second consecutive losing week as a resurgent US dollar held the price down.
The USD rally in response to the FOMC was two-fold. Firstly, the .25% rate cut was priced into the market weeks ago. Had the Fed cut rates by the larger .50%, then we would have likely seen a move lower. However, in order for the lower cut to have halted the rise in USD, the market was looking to forward guidance.
Unfortunately, USD bulls were left disappointed here as the fed unexpectedly downplayed the likelihood of future easing. The Fed said that this cut was not being viewed as the start of a lengthy easing cycle. Instead, it was merely a “mid-cycle adjustment”.
In light of recent strength in US data ahead of the meeting, the Fed’s message isn’t shocking. But, it is certainly disappointing for those who were expecting more doom and gloom, in line with recent Fed commentary.
The market is still pricing in one further rate cut over the remainder of the year. However, if incoming data continues to surprise to the upside, we are likely to see this price coming off, supporting USD further. Needless to say, this will be highly bearish for gold.
It is worth noting that gold is still underpinned by safe-haven inflows. This is given the downside move in equities as well as ongoing tension in the Middle East which continue to pose a broader risk. The recent seizure of a British oil tanker by Iran has seen the US formally calling on Germany to join it, along with France and the UK, in securing the strait of Hormuz. Given the recent hostility from Iran, such a move poses the risk for full military action between the US and Iran.
However, gold was able to recover late in the week. Risk sentiment soured in reaction to news that Trump has announced a fresh batch of tariffs on $300 billion of Chinese goods. These are due to take effect September 1st. This highlights Trump’s frustrations with the latest round of trade talks. The announcement has further taken the market by surprise.
For now, gold remains capped by the rejection from the completion of the large ABCD symmetry pattern into 1449.75. This took price back down beneath the August 2013 highs of 1433.48. However, for now, the move lower has been met by buyers at lows. Above the 1391.61 level, focus is on a further move higher.
Silver prices tracked the moves in gold this week, cascading lower over the session as USD surged higher. Furthermore, the fall in equities has also weighed on silver due to its frequent industrial usage.
Traders have also been keeping an eye on the US-China trade talks this week. Talks ended without any signs of progress and saw Trump announcing fresh tariffs. While a further round of discussions are due to take place in September, the market is now fearful that China will pull out of the talks. Doing so would lead to a further escalation of the trade war.
Silver prices have posted a strong reversal from the completion of the ABCD symmetry pattern into the 78.6% retracement mid-2018 highs at 16.5877. Price is now posting a weekly bearish engulfing candle, closing back beneath the 16.1994 level. This suggests the risk of a further reversal over the coming weeks.