Gold prices were down slightly on an intraday basis during the early European session on Tuesday. This movement represents a fascinating confluence of positive and negative market forces. Despite these losses, a notable lack of follow-through selling suggests that investors are weighing various factors that could influence the market in the coming months. With a rise in U.S. trade tensions and a slight weakening of the U.S. dollar, gold’s bears conviction is still lacking.
In the currency market, GBP/USD stayed above the 1.3600 level throughout the day with overall U.S. dollar weakness. Yet, as European trading surged on Tuesday, GBP/USD reversed some of these gains to retest the important 1.3600 as support/resistance point. This sudden currency volatility is a symptom of wider economic anxieties, and the possible effects from an important late-summer series of central banking conferences.
The European Central Bank (ECB) Forum on Central Banking will be held in Sintra, Portugal, at the end of June. Then, fast-forward a few weeks to late-August, and we have the long-anticipated Jackson Hole Economic Symposium in Wyoming. These hearings are likely to provide important clues about where monetary policy is headed in the future. It’ll be central bankers’ luck to steer their ship through these reflationary tempest-toss’d shoals of trade war.
We interpret this as Federal Reserve Chair Jerome Powell all but admitting the Federal Open Market Committee (FOMC) is about to begin making interest rate cuts. Some notable risks in the economy continue to restrain them. He emphasized that there are “multiple paths from here,” indicating that policymakers are considering various strategies to respond to evolving economic conditions.
Meanwhile the Eurozone is still having trouble with its inflation target, which has now been missed and on the upside for three years in a row. As things stand, headline inflation is only about 2%. In light of these dynamics, the ECB will likely be forced to deliver one more 25 bp cut in September. Japan’s Bank of Japan (BoJ) is waiting months to see how things shape up. It wishes to see clear and convincing evidence that underlying inflation will be moving back to the Committee’s 2% target before normalization moves.
The ECB and BoJ share fears over the fallout from tit-for-tat tariff negotiations with the U.S. They worry that these new trends might pull down growth at home and around the world. Recent reports suggest that GDP growth in the Eurozone between April and June may have been negative, heightening worries about economic stability in the region.
As market participants continue to digest this information, gold’s relatively modest losses are a reflection of a cautious and uncertain sentiment. The combination of increasing global trade tensions and a reemergence of U.S. dollar selling pressure has played a key role in fostering this uncertainty. Gold prices are flat, with no clear direction. Traders are now increasingly focused on any shifts in central banking policy or geopolitical events on the horizon.
“In a good position.”
Needless to say, the next ECB Forum and Jackson Hole Symposium will be under enormous scrutiny from investors and analysts alike. With inflation still the central bankers’ overriding concern, these events are more important than ever. Policymakers have a very difficult task. They need to continue driving economic development across the country while walking a tightrope of potential inflation.