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Gold Price Drops as US Treasury Yields Push Higher

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Talking Points:

A stronger US Dollar on the back of higher US Treasury yields (both nominal and real) has paved the way for lower Gold prices.

– Gold’s symmetrical triangle, previously eying topside resolution, has failed and broken to the downside.

Sentiment for the US Dollarhas started to turn contrarian bullishmidway though Q2’18.

For longer-term technical and fundamental analysis, and to view DailyFX analysts’ top trading ideas for 2018, check out the DailyFX Trading Guides page.

Gold prices broke below their March 1 swing low at 1302.68 today, setting up a break to fresh 2018 lows and a break of the symmetrical triangle in place since mid-January all in one fell swoop.

Concurrently, the break of the uptrend from the December 2016, July 2017, and March 2018 has now definitely broken to the downside, after the failed return to the trendline last week. Now, bearish momentum is accelerating, with Gold prices below their daily 8-, 13-, and 21-EMAs, and both MACD and Slow Stochastics trending lower in bearish territory.

Gold Price: Daily Timeframe (September 2016 to April 2018) (Chart 1)

Gold Price Drops as US Treasury Yields Push Higher

What has been the catalyst to this break lower by bullion? A stronger US Dollar on the back of higher US Treasury yields (both nominal and real) has paved the way for lower Gold prices.

Gold Price versus US Real 10-year Yield: Daily Timeframe (May 2017 to May 2018) (Chart 2)

Gold Price Drops as US Treasury Yields Push Higher

Presently, rising US real yields means that the spread between Treasury yields and inflation rates are increasing. If Gold yields nothing, has an estimated cost of carry of -2.4%, and only can return capital appreciation, it faces a difficult situation when US real yields rise.

That is, gold’s appeal as an inflation hedge relative to the US Dollar increases not in an environment when inflation is just rising, but when inflation is rising and nominal interest rates are not rising at the same pace; or in sum when US real interest rates are dropping. This has not been the case.

Currently, the 50-day correlation between Gold prices and the US real 10-year yield has reached its strongest negative correlation since the end of November 2017. That’s to say that as US Treasury yields continue to push higher, assuming inflation stays at its same rate or drops, then US real yields will continue to rise, undercutting Gold’s price even further.

Read more: US Dollar Pacing to Fresh Yearly Highs as US Yields Jump

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Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX



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Forex

US Sanctions Against Iran May Spark 1970s-Style Oil Crisis Fears

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TALKING POINTS – Iran, Sanctions, CRUDE Oil, Trump, Emerging markets

  • US oil export sanctions against Iran will be enforced on November 4th
  • Net-importers in emerging markets likely to suffer from higher prices
  • 1970’s oil crisis, embargo may haunt markets as Trump buckles down

The Trump administration’s trade wars and economic nationalism have caused severe volatility for most of 2018. The White House also withdrew from the 2015 multilateral Iran nuclear deal – known as the Joint Comprehensive Plan of Action – in May, and has re-imposed sanctions. The most devastating will be an oil embargo that is scheduled to be take effect on November 4th.

In the 1970’s, the US imposed an oil embargo against Iran that led to a surge in prices. The jump in energy costs radically affected markets. The US – which at the time was coming on the heels of massive public spending programs– had its inflationary pressure skyrocket.

The administration’s public spending agenda, coupled with the sanctions against Iran, echo a dangerously similar narrative the world saw 39 years ago.

1979 OIL CRISIS

In 1979 – amid the turmoil of the Iranian Revolution – political radicals stormed the US Embassy and took 52 Americans hostage. In response, US President Jimmy Carter froze billions of dollars’ worth of Iranian assets in the United States and enforced an oil embargo.

The decrease in oil exports – adding to growing fears of further disruptions – caused prices to climb. Adjusted for inflation, the price per barrel stood at around $55 in 1978. In 1979, the cost skyrocketed to $97 and peaked at $122 in 1980. In 1981, the hostages were released and the price began to fall.

Oil Embargo

DailyFX Trade War Infographic

See our full interactive history of trade wars here.

Some economists and historians argue that “precautionary demand” was an influential contributing factor to the increased cost of oil. This same fear may be rearing its ugly ahead again today.

2018 OIL EMBARGO ON IRAN

After unilaterally pulling out of the nuclear deal – due to allegations that Iran was not cooperating with the International Atomic Agency – the Trump administration hit Tehran with two waves of sanctions. The first included a ban on any transactions involving the US Dollar, gold, precious metals, aluminum, steel, commercial passenger aircraft and coal. The White House has also banned imports of Iranian carpets and foodstuffs.

The second wave will be the oil embargo. Trump warned that anybody who conducted business in the Iranian market would face “severe consequences”. The ban requires that all importers have to immediately cut off their supply from Iran by November 4th. Any countries that violate the ban face the possibility of sanctions. The EU responded by pledging to protect European firms by activating a blocking statute established in 1996. It allows European businesses to operate under US sanctions without incurring any penalties.

The EU’s defiance to the US adds to the growing tension between allies amid the escalating trade wars. The sanctions also empower hardliners in the Iranian government. This makes the possibility of repairing relations and easing international tension much more difficult.

EFFECT ON MARKETS

If the US imposes sanctions or tariffs against the EU for conducting business with Iran, they will almost certainly retaliate. In that event, sentiment-linked assets are likely to suffer and anti-risk currencies like the Japanese Yen or Swiss Franc will probably rise.

Euro Falling on Trump’s Iran Sanctions Announcement

US Sanctions Against Iran May Spark 1970s-Style Oil Crisis Fears

Crude oil has reached a four-year high, with the Brent benchmark trading at around $84/barrel. Rising prices are damaging for net importers in emerging markets. If Trump digs his heels in and commits to limiting Iran’s oil exports, emerging markets are likely to suffer.

Indonesian Rupiah and South African Rand vs the Dollar and Rising Oil Prices

Indonesian Rupiah and South African Rand vs the Dollar and Rising Oil Prices

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— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter



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GBP/USD Gaps Lower on Brexit Stall, Eyes CPI and Carney Speech

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Talking Points:

  • GBP gapped lower versus USD, responding to Theresa May’s rejecting of an exit deal
  • GBP/USD’s downside momentum continues dominant downtrend for majority of 2018
  • Key economic data and BOE Gov. Carney’s speech may further influence the British Pound

Find out what retail traders’ British Pound buy and sell decisions say about the coming price trend!

The British Pound fell against the US Dollar during weekend trading as Brexit negotiations between the United Kingdom and the European Union hit an impasse. UK Prime Minister Theresa May’s Brexit Secretary Dominic Raab and EU Chief Negotiation Michael Barnier were unable to reach an agreement on a draft treaty, leading PM May to label the deal a “non-starter”. Barnier later mentioned that some key issues remain open, including the Irish backstop.

GBP/USD 1-Hour Chart

GBP/USD Gaps Lower on Brexit Stall, Eyes CPI and Carney Speech

This is the latest in ongoing Brexit turmoil, and could possibly bode ill for the Sterling’s recent upside momentum. If a deal is not reached, the United Kingdom would exit the EU and be subject to World Trade Organization rules, potentially causing declines in GBP. Furthermore, longstanding political uncertainty and tensions regarding Brexit have caused the GBP to weaken for the majority of this year. Furthermore, an increasingly hawkish Federal Reserve and haven demand amidst EM contagion fears and trade wars have caused the greenback to strengthen, intensifying the currency pair’s bearish action since April 2018.

GBP/USD Daily Chart

GBP/USD Gaps Lower on Brexit Stall, Eyes CPI and Carney Speech

Looking ahead, this is a week of high economic activity for the British Pound. On Wednesday, the UK Statistics Office will release consumer inflation data for the month of September. In addition, Bank of England Governor Mark Carney is set to give a speech on Thursday, with forward guidance possibly dictating next moves for the Pound. However, ongoing Brexit negotiations will continue to take center stage and overshadow economic data’s influence on the Sterling. Developments upcoming summit of European Union leaders focusing on Brexit could cause volatility shocks to the currency pair.

GBP/USD Trading Resources

— Written by Megha Torpunuri, DailyFX Research Team



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Unsteady Risk Trends Increase Scrutiny on China, Italy and Brexit

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Market participants will return with caution this week. Following the rout in speculative assets from shares to emerging markets to Yen crosses, there is an understandable tension amongst investors. In this environment troubling news in trade wars, Chinese growth, Euro-area stability or any number of key themes can readily find traction.

New Zealand Dollar Forecast – New Zealand Dollar May Look Past CPI, Focus on Stocks, USD & Fed

Any signs that the Fed could remain hawkish despite the global stock selloff could reignite USD at the expense of NZD, this may overshadow gains on an upbeat local CPI data.

Japanese Yen Forecast – Speculation for Above-Neutral Fed Rate to Curb USD/JPY Weakness

Fresh developments coming out of the U.S. economy may curb the recent selloff in USD/JPY as Federal Reserve officials see a risk for above-neutral interest rates.

Oil Forecast – Oil Demand Forecasts Cut After Risk Rout Leads to Worst Week Since May

After trading to four year highs to open the month, Crude has come off the highs along with risk sentiment, but you crude appears to have fundamental support that could keep bulls confident.

British Pound Forecast – Heightened Risk Doesn’t Reward Position-Taking This Week

It may be uncomfortable but sitting on the fence is the best place to be ahead of next week’s Brexit updates and EU Summit

US dollar Forecast – US Dollar May Find Renewed Strength in FOMC Meeting Minutes

The US Dollar may find renewed strength after last week’s confounding drop as minutes from September’s FOMC meeting signal officials’ intent to press on with rate hikes

Gold Forecast – Gold Price Outlook Finally Impacted by Safe Haven Demand

Gold was the beneficiary of safe haven demand this week after the Dow lost over 1,300 points in just two days.

Australian Dollar Forecast – Australian Dollar Held Up Last Week, May Not Do So Again

The Australian Dollar held up quite well to the intensification of one or two factors which have stymied it this year. Don’t rely on that continuing

Chinese Yuan Forecast: Yuan May Extend Loss on China’s Q3 GDP, Eyes on PBOC for Reference

China’s weak economic growth could add more bearish momentum to the Yuan; at the same time, Chinese regulators may try to avoid extreme volatility.

Weekly Fundamental Forecast: Unsteady Risk Trends Increase Scrutiny on China, Italy and Brexit

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

See how retail traders are positioning in the majors using the IG Client Sentiment readings on the sentiment page.



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