By Lukman Otunuga, Research Analyst at FXTM
The story defining Gold’s rough and rocky depreciation during Q2 revolved around a broadly stronger Dollar and mounting expectations of higher US interest rates.
Conflicting fundamental themes observed in the early parts of Q2 initially trapped prices within a range, with the metal hunting for a directional catalyst to make the next big move. One would have expected the combination of escalating global trade tensions and heightened political risk in Europe to heavily support the safe-haven metal. However, markets witnessed the complete opposite, as Gold’s trajectory remained negative despite growing risk aversion. It must be kept in mind that historically, the precious metal has benefited from the flight to safety amid uncertainty, but this has not been the case in recent months.
Price action continues to suggest Gold remains extremely sensitive to the negative correlation against the Dollar.
As we head into the third quarter of 2018, investors will most likely continue monitoring to see whether Gold is able to regain its safe-haven allure. While expectations of higher US interest rates this year and a stronger Dollar could keep Gold bulls at bay, concerns over a global trade war are likely to repel bears. The recent rise in inflation could be a welcome development for Gold, which is an attractive inflation hedge. However, gains are likely to remain threatened by Fed rate hike speculation. It is worth noting that President Trump’s trade war with China and EU remains a major threat to global stability and this must not be overlooked. An unfavorable situation where an all-out trade war becomes a reality may negatively impact global growth, delay monetary policy normalization and fuel risk aversion, ultimately supporting Gold. Investors should also continue to closely monitor the Dollar performance which is likely to play a role in where Gold concludes in Q3.
The technical picture continues to illustrate that Gold remains under intense pressure on the monthly and weekly timeframe. With prices finding comfort below the psychological $1300 level, price action suggests that the medium to longer term trajectory is likely to remain negative. A decisive break down below the $1245 may open a path towards $1213.
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