Concerns about global growth have intensified amid persistently high inflation, the energy crisis in Europe and China, and China’s fight against covid. Global growth concerns dampened risk appetite and caused market participants to turn to the safety of the US dollar, but other safe havens such as gold, bonds, the Japanese yen and the French Swiss have failed to attract buyers due to their individual difficulties.
The US dollar is on the rise and has tested the 2002 highs several times this year. It is considered the preferred asset as the US economy is expected to do better than other economies and the US Fed is expected to lead other central banks in monetary tightening.
The recent leg of the US dollar’s rally came after hawkish comments from Fed officials chased even the smallest dove out of the market. While the Fed has always maintained its priority of controlling inflation, market participants debated the possibility of a slowdown amid signs of stress in the economy and some improvement in the situation of the inflation. Back-to-back hawkish comments from Fed officials, including Fed Chairman Jerome Powell, cemented market expectations that rate hikes could continue until inflation is brought under control. After debating between a 50 basis point or 75 basis point rate hike for the upcoming September meeting, market participants now expect the central bank to raise the interest rate from 0, 75% for a third consecutive meeting.
Comments from Fed officials indicate that the central bank cannot change its stance unless inflation is brought under control. While market sentiment remains skewed in favor of aggressive moves, the debate over the Fed’s future moves may continue as the US central bank may also want to avoid a major downturn. Signs of strain in the economy are growing. Recently, the US Nonfarm Payrolls report noted that employment growth slowed significantly in the past month. After a huge job growth of 5,26,000 in July, jobs only increased by 3,08,000 last month while the unemployment rate fell from 3.5 to 3.7%. While the Fed was seen as the leader in rate hikes, other central banks are also catching up. A number of ECB officials have expressed the need for aggressive measures to control inflation. The next test could come from the ECB’s monetary policy decision next week.
Gold is further under pressure from concerns over consumer demand. The outlook for China’s economy has weakened significantly amid strict adherence to the zero-COVID policy, tensions in the property market and energy crisis in some regions. We saw a brief respite as China stepped up its efforts to support the economy in the form of increased infrastructure spending, but concerns about growth resurfaced amid mixed economic numbers and a further increase in virus cases. India’s demand outlook has also been challenged due to higher prices due to a weaker rupee and higher tariffs.
Amid gold’s struggle for direction, ETF investors continued to exit. Gold holdings with SPDR ETF fell to the lowest level since April 2020 this week. ETF investors may stay away unless there is a clear price outlook for the metal.
Gold has had its ups and downs and this trend may continue in the near term as market participants assess global economic health, central bank monetary policy stance as well as geopolitical issues. While sentiment has weakened significantly, the US dollar could falter as market participants focus on growing challenges to the US economy as well as the hawkish stance of other central banks, meaning a rebound fix cannot be ruled out. Two major events to watch in the near term are the ECB’s monetary policy decision of September 8, 2022, which could set the stage for the Fed meeting later this month.
Concerns about global growth have intensified amid persistently high inflation, the energy crisis in Europe and China, and China’s fight against covid. Global growth concerns dampened risk appetite and caused market participants to turn to the safety of the US dollar, but other safe havens such as gold, bonds, the Japanese yen and the French Swiss have failed to attract buyers due to their individual difficulties.
The US dollar is on the rise and has tested the 2002 highs several times this year. It is considered the preferred asset as the US economy is expected to do better than other economies and the US Fed is expected to lead other central banks in monetary tightening.
The recent leg of the US dollar’s rally came after hawkish comments from Fed officials chased even the smallest dove out of the market. While the Fed has always maintained its priority of controlling inflation, market participants debated the possibility of a slowdown amid signs of stress in the economy and some improvement in the situation of the inflation. Back-to-back hawkish comments from Fed officials, including Fed Chairman Jerome Powell, cemented market expectations that rate hikes could continue until inflation is brought under control. After debating between a 50 basis point or 75 basis point rate hike for the upcoming September meeting, market participants now expect the central bank to raise the interest rate from 0, 75% for a third consecutive meeting.
Comments from Fed officials indicate that the central bank cannot change its stance unless inflation is brought under control. While market sentiment remains skewed in favor of aggressive moves, the debate over the Fed’s future moves may continue as the US central bank may also want to avoid a major downturn. Signs of strain in the economy are growing. Recently, the US Nonfarm Payrolls report noted that employment growth slowed significantly in the past month. After a huge job growth of 5,26,000 in July, jobs only increased by 3,08,000 last month while the unemployment rate fell from 3.5 to 3.7%. While the Fed was seen as the leader in rate hikes, other central banks are also catching up. A number of ECB officials have expressed the need for aggressive measures to control inflation. The next test could come from the ECB’s monetary policy decision next week.
Gold is further under pressure from concerns over consumer demand. The outlook for China’s economy has weakened significantly amid strict adherence to the zero-COVID policy, tensions in the property market and energy crisis in some regions. We saw a brief respite as China stepped up its efforts to support the economy in the form of increased infrastructure spending, but concerns about growth resurfaced amid mixed economic numbers and a further increase in virus cases. India’s demand outlook has also been challenged due to higher prices due to a weaker rupee and higher tariffs.
Amid gold’s struggle for direction, ETF investors continued to exit. Gold holdings with SPDR ETF fell to the lowest level since April 2020 this week. ETF investors may stay away unless there is a clear price outlook for the metal.
Gold has had its ups and downs and this trend may continue in the near term as market participants assess global economic health, central bank monetary policy stance as well as geopolitical issues. While sentiment has weakened significantly, the US dollar could falter as market participants focus on growing challenges to the US economy as well as the hawkish stance of other central banks, meaning a rebound fix cannot be ruled out. Two major events to watch in the near term are the ECB’s monetary policy decision of September 8, 2022, which could set the stage for the Fed meeting later this month.
