As trade tensions between the world’s two largest economies continued to escalate, gold prices kept rallying above 6-year high on Wednesday, finding support from investors rushing into safe havens. Moreover, as trade tensions between the sides dashed hopes for a trade deal, risks have arisen that this would further weigh on already slowing global economy. This also increased expectations that Fed would continue cutting the rates but St. Louis Fed President James Bullard said yesterday it would be irrational to expect Fed to react each threat regarding trade war and wait-and-see approach would be appropriate before deciding any rate cut as Fed needed to assess incoming data. In the meantime, data released today showed German industrial production fell sharply in June, signalling possible contraction in the Q2.
Gold prices hit above $1,490 an ounce on Wednesday by finding support from investors fleeing from risky assets and rushing into safe havens due to escalating trade tensions between the US and China.
As of 15:48 GMT+3, spot gold was trading at $1,493.81 an ounce while dollar index was steady at 97.62. US 10-year Treasury yield weakened further to 1.64.
DailyFX senior currency analyst Ilya Spivak said trade dispute was the catalyst for gold prices while possible prolonged trade war due to fiery rhetoric from both sides increased worries that it would pose risks to the global economy. Spivak also said, $1,513.94 and $1,540.70 would be next resistance levels after yellow metal broke $1,492.31.
Hopes for a trade deal between the US and China were dashed as the US announced additional tariffs on Chinese goods worth $300 billion as of September 1 while possibly prolonged trade war between sides added concerns that it would weigh on already slowing global economy. Thus, chances for another 25 basis point rate cut by Fed in September is 81.2%, according to CME Group FedWatch Tool after Federal Reserve cut the rates by a quarter point last month for the first time since the global recession.
Yet, St. Louis Fed President James Bullard said yesterday that it was not realistic to expect Fed to react each threat and counter threat regarding trade war while underlining it would be appropriate to wait-and-see as Fed would assess incoming data before deciding a rate cut in September. Bullard added, effects of previous monetary policy moves lagged behind and only started to have an impact on macroeconomic outlook while adding if a rate cut was warranted, this would be due to support weak inflation and inverted short and long term yield curves which had been signalling further weakness in economic outlook.
In the meantime, data released today showed that industrial production in Germany sharply contracted in June as it fell by 1.5% on monthly basis, above expectations of 0.4% decline. Although data released yesterday showed strong factory output, economy is not at a recovery point which is why export-driven German economy is expected to show further weakness in the coming months due to US-China trade war, global economic slowdown and Brexit uncertainty and risks for a recession have arisen due to expected 0.2% contraction in the Q2 after slight recovery in the Q1.