Written by Lukman Otunuga, Research Analyst at FXTM
- Dollar’s throne under threat as Fed flags interest rate cut
Attraction towards the US Dollar is set to fade during the second half of 2019 as expectations mount over the Federal Reserve cutting interest rates for the first time in more than 10 years.
Persistent US-China trade tensions, concerns over slowing global growth and instances of disappointing economic data from the United States have left the Federal Reserve cautious and ready to make a move. Lower interest rates in the largest economy in the world is bad news for the Greenback, as foreign investors flock to countries with higher returns. With the International Monetary Fund (IMF) recently stating that the US Dollar “was overvalued by 6%-12%”, further pain is in the cards for the currency. The Dollar’s safe-haven status will be challenged during H2, especially if trade tensions impact US economic growth and fuel speculation of more US interest rate cuts by the Federal Reserve.
- China’s economy slips to record low growth as trade tensions bite
China was one of the major talking points this week after its economy grew at the slowest pace in 27 years thanks to the trade war with the United States.
The mood across markets is likely to remain cautious given how the second-largest economy in the world grew 6.2% in the second quarter of 2019. Now that China has sneezed again, other nations across the globe are likely to catch a cold during the second half of 2019. Trade tensions between the two largest economies in the world remain a significant threat to global stability, and these concerns should keep investors guarded and on high alert. Further signs of trade disputes hitting the second largest economy in the world will most likely weaken riskier assets such as stocks while increasing appetite for safe-haven investments like gold and the Japanese Yen.
- Oil prices dragged lower by demand concerns
The outlook on global growth and direction of US-China trade talks will heavily influence where Oil concludes this year.
Fears over slowing global growth negatively impacting demand for Crude Oil have put a lid on WTI and Brent prices. Although OPEC+ have agreed to extend production cuts till March 2020, oil markets are more concerned with the demand side of the equation and whether appetite for Oil will improve this year. For as long as these fears remain present, WTI and Brent as positioned to weaken further in the short to medium term.
- There is no place like Gold in a low-interest rate environment
Gold is set to shine with extreme intensity thanks to a weaker Dollar, fears revolving around slowing global growth and most importantly lower interest rates across the globe.
The precious metal tends to perform well in a low-interest rates environment, given how it is a zero-yielding asset. Rising expectations over the Federal Reserve cutting interest rates this year should ensure a solid foundation for the precious metal to appreciate. Gold prices are trading comfortably above $1400 as of writing and are positioned to sprint towards $1450 when the Federal Reserve cuts interest rates for the first time since 2008.
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