Escalating geopolitical tensions and uncertainties around trade have sent shockwaves through the currency market. Consequently, they have formed a bullish medium-term bias for gold denominated in U.S. dollars (XAU/USD). Investors are freakin’ out about it. This has resulted in major moves in the USD/JPY and AUD/USD currency pairs, reflecting these macro trends.
The USD/JPY pair has seen a sharp drop, prolonging its retracement from a two-week peak. Analysts point to a combination of economic unrelated – yet connected – factors that have devalued the U.S. dollar vs. the Japanese yen. Consequently, the USD/JPY cross appears even more exposed. This vulnerability is made worse by the rising bets on imminent cuts to the Federal interest rate by the U.S. central bank—the Federal Reserve. Softer U.S. Consumer Price Index (CPI) data bolsters hopes for earlier cuts.
The U.S. dollar index is back near its monthly low. Traders are increasingly looking ahead to the chance for a September rate cut. Many economists are interpreting this cooling inflation as a sign that we’re beginning a change in the Fed’s demonetization policy.
“USD/JPY is undermined by a combination of factors; seems vulnerable.” – FXStreet
The Australian dollar (AUD) has been surprisingly resilient. Nonetheless, it has made notable headway with AUD/USD trending higher within a well-established trading channel. The pair is still not far away from its year-to-date (YTD) high, luring some opportunistic dip-buyers in during Thursday’s Asian session. So even with the economic uncertainty being felt around the world, these developments indicate that positive news is coming for the Australian dollar.
Furthermore, the recent uptick in AUD/USD is seen as a stall in its overnight pullback from the YTD peak, indicating robust support levels. As traders continue to feel out these market dynamics, eyes are peeled over the balance between geopolitical factors and economic drivers.
“AUD/USD edges higher in a familiar range; remains close to YTD top.” – FXStreet
The current geopolitical tensions and trade uncertainties have come together to create a bullish trend for gold prices. As a safe-haven asset, in times of uncertainty gold has shown a tendency to draw investment. Gold price bulls are winning out in the ongoing market. The dual influence of Fed rate cut bets and safe-haven buying is fueling this advantage.
“Gold price bulls have the upper hand amid Fed rate cut bets, safe-haven buying.” – FXStreet
The USD is under pressure, as a rebalancing begins in light of signs of U.S. inflation cooling. At the same time, the Japanese yen strengthens on hawkish BoJ expectations. Diverging central banks have made for a hostile environment for currency traders. They need to artfully parse economic metrics and geopolitical considerations to get it right.