US tariff policy hurting USD

There has been some stability in the markets, as sentiments have improved following the announcement of trade agreements with the USA and UK.

This development has also positively impacted the foreign exchange market. However, the US Dollar is facing challenges, having lost nearly 6% to 7% of its value this year.

For many years, US assets have been considered a safe haven, but the current tariff policy seems to be hurting the USD. Investors are increasingly moving their assets to Europe, which appears more affordable and stable amid the ongoing global trade war and the associated uncertainties. This trend is likely one of the significant factors contributing to the sharp rise of the Euro this year.

Not all investors think about shifting their US investments. There are several reasons why investing outside the US can be risky.

One big concern is that markets can be hard to sell in times of uncertainty, which can cause big price swings and make it tough to cash out. Since these markets are usually smaller, a lot of assets moving in can increase risks even more.

Additionally, it’s noteworthy that US stocks, which experienced significant losses following “Liberation Day,” have nearly bounced back. Current focus is on the upcoming meeting between trade representatives from the US and China in Switzerland. Progress in these discussions is anticipated, as they mark the first step in negotiations, potentially easing tensions for the time being. I believe that US-China trade talks will be a key market driver this week.

Last week, as expected, the Federal Reserve kept US interest rates steady at 4.25% to 4.5%, citing tariffs that have altered the economic outlook. In his press conference, Fed Chairman emphasized the effects of tariffs and noted that the Central Bank could respond quickly if necessary. He repeatedly mentioned the phrase “wait and see,” reflecting a neutral stance and a cautious approach.

It is evident that the Fed is not rushing to lower interest rates, believing that the current policy is appropriate. In essence, tariffs are influencing the direction of interest rates.

While, in the first quarter, Japan’s economy saw a slowdown, dropping from 0.6% growth to just 0.1%. While household spending and tourism have seen an uptick, the negative impact of tariffs on exports is likely affecting the overall economic health.

Should this reduction in growth persist, it may delay the Bank of Japan’s plans to raise interest rates.

Meanwhile, as I indicated in my post last week, the Bank of England has lowered the UK’s rates by 25 basis points to 4.25%.

Gold experienced significant fluctuations last week, with investors eager to purchase gold during dips. The primary factors influencing gold are the trade discussions between the US and China, along with increased Chinese demand for gold during price declines. Additional factors affecting gold include inflation and recession fears in the US. While I initially anticipate some progress from the Switzerland trade talks, I do not expect a definitive decision. However, both sides’ commitment to future negotiations could uplift market sentiments, keeping gold investors alert.

This suggests that gold prices will likely fluctuate between bullish and bearish trends, with the market remaining neutral to volatile until more concrete information emerges.

Investor interest in buying gold on dips is projected to grow, as expectations for higher gold prices in the future persist.

A strategy shift among investors towards increasing portfolio allocations in Europe, as opposed to the US, hints that gold will continue to be supported as a safe haven asset.

Next week’s trading ranges for gold could be between $3180 and $3425.

On the economic front, the key reports to watch include the US PPI and Retail Sales figures, weekly jobless claims, the Empire State Manufacturing survey, and the Philadelphia Federal Reserve Manufacturing survey. Additionally, the preliminary University of Michigan Consumer Sentiment for May will be released on Friday.

The market will also be attentive to comments from Fed Chair Jerome Powell during his speech in Washington, DC this week.

WEEKLY OUTLOOK - May 12-16

GOLD @ $ 3326.60— Gold may be in for another week of volatility. Only break of $ 3384 could push gold towards $ 3420. However, a decline below $ 3272-78 would lead to a drop towards $ 3220.

EURO @ 1.1255— There is limited downside risk. The support level of 1.1120-30 is expected to hold for a move towards 1.1330. A break below this level would pave the way for a rise to 1.1440. Conversely, a dip below this support could increase the risk of testing the 1.1050 area.

GBP @1.3305— Pound Sterling needs to surpass 1.3390 to reach 1.3455. Following a short upward move, Cable is anticipated to decline. A drop below 1.3210 might prompt a move towards 1.3140.

JPY @ 145.36— USD is anticipated to maintain its upward trend and is likely to remain above the 144.20 mark, targeting a test and potential breakout at 146.25, with an aim for 146.70-80. However, a downward breach of the support level could result in a possible test of 143.05.

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