Strong US growth during the second quarter has kept stocks supported and bond yields relatively stable. This, however, could be as good as it gets with the impact of raised trade tariffs, higher gasoline prices and higher funding costs beginning to be felt during the second half. An escalated trade war, which reduces growth prospects further, is likely to cause a rethink by the Federal Open Market Committee in terms of raising interest rates further. The dollar would likely suffer in such a scenario as it would pause the further widening of the interest gab to other currencies.
Gold is once again looking for buyers ahead of $1,200/oz, an area which has provided support in the past and which represents a 50% retracement of the $329/oz rally seen between December 2015 and July 2016. For this level to hold, however, it is clear that the dollar appreciation needs to pause or reverse, especially against the yuan as highlighted above. Selling pressure from funds may also begin to slow after they accumulated the biggest gross-short on record. This has left gold in a better position to react to so far absent price-friendly news.