03/08/2016 07:58 AST
The Federal Reserve held rates unchanged and refused to move interest rates higher during its July meeting, boosting buying interest in Gold. The precious metal broke out of its holding pattern just after the Fed’s statement on July 28th, rising quickly past $1341/ounce from $1320 as investors rushed back to their safe-haven outlook.
It is the latest round in a fierce tug-of-war between rising and falling US rate expectations, coupled with risk aversion stemming from concerns over the global economy. Buyers are constantly falling back on Gold over the medium term. However, due to resurgent USD strength, the precious metal has fallen from the $1365/ounce milestone high seen in the aftermath of the Brexit vote on June 24th. During July, the Dollar appreciated to levels not seen since late March on US interest rate hike speculation. Now that the Federal Reserve has once more thrown cold water on this heated anticipation, it has dampened the USD in the short term but as long as the Fed continue to remain upbeat over upcoming months then this might reduce larger risks for the USD.
Another of the major reasons for Gold’s retracement is the market’s expectations that central banks will keep increasing monetary stimulus. Investors betting on more easing moved towards equity markets and away from Gold, an example of this was seen on the FTSE in the weeks following the Brexit vote. In July at least, the signals from pressured central banks like the Bank of England have not materialized into concrete actions, and this could start weighing on currencies and equities as we move further into the third quarter. The primary focus for investors remains on profit-taking and limiting risk, meaning that buying drives rapidly change gears between Gold, equities and currencies.
Commodities appear to be the losers in this race for returns. As we pointed out in the run-up to the Brexit vote, the uncertainties continue to trigger fears over slowing global growth, impacting WTI Crude Oil and pushing back expectations for further price recovery. As the oversupply of oil collides with the Brexit crisis, the WTI benchmark declines to fresh three-month lows at $42.35. Investor attraction to the commodity has been turned off for an extended period, with the persistent over-supply woes sabotaging any real recovery in value.
Low oil prices could be an ongoing theme as the toxic combination of excessive supply and declining demand encourage renewed rounds of selling. From a technical standpoint, WTI Crude is bearish, traders are watching for a weekly close below the $42/barrel level, which would likely invite further sell-offs.
Political developments between the United Kingdom and the European Union are likely to keep impacting on the trading markets until the end of the year. The negotiators appointed to handle Brexit talks are from opposite ends of the political spectrum. UK chief negotiator David Davis is a strong advocate of complete sovereignty from the EU, and his EU counterpart Michel Barnier advocates a stronger European Union at all levels. That the UK seriously needs to keep its access to EU markets is not in doubt; European countries account for 44 percent of its exports supporting three million jobs. Inward investment to the UK from the EU was 496 billion GBP in 2014, meaning almost half of all foreign direct investment.
If and when Article 50 is triggered, a lot depends on whether the negotiations will be pragmatic and rebuild a new and workable partnership between the EU and the UK, or whether hardball is the name of the game. The biggest concern from the market’s perspective is whether the UK’s economy can be saved a great deal of pain by remaining in the single market. So far, the signals from both sides are not overly encouraging, but it’s early days yet.
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