Safe haven

As concerns over Italy’s political turmoil intensified on Tuesday and Italian debt risks continued to rise sharply, equity markets were pummeled on the increasing likelihood of political and economic instability in the eurozone.

Although the US dollar was flat-to-lower overall on Wednesday, USD/JPY saw a strong surge as the Japanese yen fell broadly and sharply on higher risk appetite.

Market volatility surged sharply yet again on Thursday as equities tumbled on political concerns and fears of a potentially escalating global trade war.

USD/JPY saw a substantial bounce from the key 112.00 support area.

The price of gold fell for a third consecutive day this week, erasing most of its gains from the previous week, as several market factors continued to weigh on the precious metal. Although the US dollar was modestly down on Wednesday, the first half of this week has seen a rebound from the previous week’s pullback.

Due to this rise in Fed expectations, the US dollar extended its recent recovery and gold continued to fall in the immediate aftermath of Friday’s employment release. While these market moves soon reversed, however, the dollar remains supported and gold remains pressured on both the prospect of a near-term rate hike in December as well as the possibility that a more hawkish Federal Reserve Chair will be nominated by the Trump Administration and appointed after current Chair Janet Yellen’s term expires in February.

Gold prices have been battered relentlessly for more than three weeks as the US dollar has generally been rising in recovery mode from its long-term lows, expectations for a Fed rate hike in December have increased, and markets have failed to be daunted by recent geopolitical risk events and conditions.

The US dollar was mixed on Monday – down against the safe-haven Japanese yen and up against the euro in the aftermath of Sunday’s German election – but was broadly higher overall against a basket of major currencies. Despite this renewed strength in the greenback, which has been driven largely by increased expectations of a December Fed rate hike in the wake of last week’s hawkish FOMC meeting, the price of gold defied these factors and surged on a spike in safe-haven demand.

On Wednesday, as the US dollar extended this week’s rebound from last week’s long-term lows against a basket of other major currencies, gold prices continued to pull back within the sharp uptrend that has been in place for the past two months. US inflation data on Wednesday morning, in the form of the Producer Price Index, helped give a further boost to the dollar, resulting in continued pressure on dollar-denominated gold. Although the PPI reading for August fell short of expectations at a 0.2% rise against a prior consensus forecast of 0.3%, the increase represented a significant rebound from July’s -0.1% decline in producer prices. Looking ahead to Thursday, the US Consumer Price Index for August will be released, with a consensus forecast of +0.3% (and core CPI, excluding food and energy, expected at +0.2%), following July’s lower-than-expected +0.1% rise.

The British pound surged on Tuesday after a key UK inflation measure in the form of the Consumer Price Index came out at +2.9% year-over-year for August, higher than both the +2.8% expected and the +2.6% reading from the previous month. This higher-than-expected inflation data is likely to prompt a more hawkish stance from the Bank of England when the central bank provides its monetary policy summary and bank rate decision on Thursday. As a result of the CPI release, the pound rose sharply against the US dollar, euro, and yen, among others.

As global market risks have ratcheted up recently, most notably due to the increasing nuclear threat stemming from persistent North Korean missile testing, equity markets fell sharply on Tuesday while safe-haven assets, including the Japanese yen and gold, surged. As we’ve suggested previously, market concerns may ebb and flow on a day-to-day basis, but the underlying geopolitical risks currently impacting markets are highly unlikely to go away any time soon, and will most likely increase substantially going forward. This impact can be readily seen in the price of gold, which has extended a sharp two-month rally due to a combination of the noted flight-to-safety, continued weakness in the US dollar, and a Federal Reserve that seems increasingly hesitant to raise interest rates.

Since pulling back from its new 18-month high at 131.39 early this month, EUR/JPY has spent the past three weeks exhibiting the potential pattern of a new bearish trend, complete with lower highs and lower lows, as well as sharp drops interspersed with relatively weaker pullback rallies. Currently trading within one of those relatively weak pullback rallies, EUR/JPY could be poised to extend its recent breakdown, especially if the euro’s latest stumble and yen’s recent strength resume as expected.

On Friday, US equity markets stabilized and began to recover from the sharp plunge in stocks a day earlier. Volatility returned to lower levels and Thursday’s strong demand for safe-haven assets diminished significantly as of mid-day Friday. Heightened market volatility was initially sparked by widespread worries that the Trump Administration’s pro-business agenda would be disrupted by President Trump’s recent controversial remarks and his dramatic loss of support from both business and government leaders. These worries were partly ameliorated on Friday after reports that Steve Bannon, one of Trump’s top and most divisive advisors, would be dismissed from the team. This increases the chances that Trump’s chief economic advisor, Wall Street veteran Gary Cohn, would remain in his position as the most important pro-business voice in the administration.

The intense, threat-filled rhetoric between North Korea and the US that pulled down equity markets and pushed up safe-haven demand last week toned down a notch over the weekend, putting investors at more ease. Senior US officials, including Secretary of State Rex Tillerson and Secretary of Defense James Mattis have appeared to take on a much more diplomatic and conciliatory stance to North Korea than President Trump has, which gave the markets some confidence that a military/nuclear confrontation may likely be avoided for the time being.

Though the US dollar was relatively flat on Thursday, USD/JPY made a key breakdown below a confluence of price support as a result of sustained demand for the safe-haven Japanese yen amid rising tensions and saber-rattling between North Korea and the US.

Within the past week, sterling has finally begun to show signs of weakening against the US dollar after a prolonged bullish trend. Against the euro, the pound has been steadily falling for the past three months. GBP/JPY has also begun to falter as a weaker pound has combined with heightened safety demand for the Japanese yen amid rising concerns over the North Korean nuclear threat.

Gold prices remained subdued on Thursday during a relatively quiet week in the markets, which have continued to exhibit extremely low volatility. Recently plunging crude oil prices have stoked some market concerns, but crude staged a tentative rebound on Thursday, alleviating some of that market pressure. The past few days have seen gold attempt a relief rally after two weeks of sharply falling prices that have been exacerbated by market complacency, a modestly stronger US dollar and more hawkish-leaning central banks, most notably the Federal Reserve.

The price of gold has been heavily pressured for the past two weeks as commodity prices have generally slumped, the Federal Reserve has signaled more rate hikes, the US dollar has staged a significant relief rebound, and persistent risk appetite in the markets has decreased demand for safety assets like gold. This confluence of factors weighing on the precious metal has pushed price down to a key uptrend support line extending back to the December lows.

A mild shake-up in US markets occurred late on Tuesday after two potential risk events surfaced: President Trump unexpectedly fired FBI Director James Comey, and a North Korean official issued a threat of more nuclear tests. As of Wednesday morning, however, these incidents have not significantly deterred a continuing risk-on market environment and recent rebound for the US dollar.

With most of the votes for the first round of the French presidential election reported late on Sunday, the outcome has emerged very much as pre-vote polling had suggested. Centrist Emmanuel Macron and far-right candidate Marine Le Pen have been voted through to advance to the second and final round of voting, set for May 7th. Though it was a close race to the very end, first round votes eliminated both the conservative candidate Francois Fillon and far-left, anti-EU candidate Jean-Luc Melenchon. Macron emerged with around 24% of the votes, with Le Pen trailing at around 22%. Fillon and Melenchon each received around 20% of the votes.