Gold Surges Amid US Dollar Volatility: US-China Trade War and Market Impact

Donald Trump’s reversal of tariffs on Canadian and Mexican imports led to a strong rebound in the S&P 500. Investors interpreted this move as a de-escalation of trade tensions in North America. However, tariffs on Chinese imports remain in place, prompting swift retaliation from Beijing. China imposed duties of 15% on US coal and LNG and 10% on crude oil, farm equipment, and automobiles. It also launched an anti-monopoly probe into Google, including US firms on its “unreliable entities list.” These actions suggest a prolonged trade conflict between the world’s two largest economies.

On the other hand, financial conditions continue to be favourable, with Moody’s Baa corporate bond spread narrowing to 1.45%. The chart below shows this is the lowest level since 1997. This indicates strong credit availability, which supports corporate borrowing and investment.

Additionally, the ISM Manufacturing PMI rose to 50.9%, the highest level in over two years. A PMI reading above 50 indicates expansion, meaning that manufacturing activity is increasing. Since this is the highest level over two years, it suggests a recovery and rising demand for goods, potentially driven by stronger consumer spending and business investment.

Impact of US-China Trade War on Gold

The trade war is likely to strengthen the US dollar. A stronger dollar results from global economic uncertainty as investors seek safe-haven assets. The US also maintains a trade deficit with China, meaning tariffs on Chinese goods will have a larger impact on Chinese exports than on US imports.

Additionally, inflationary pressures from tariffs may prompt the Federal Reserve to adopt a more hawkish stance, potentially leading to higher interest rates. Higher long-term Treasury yields would reinforce dollar strength but could negatively impact stocks and bonds by increasing borrowing costs and reducing corporate profitability.

Gold (XAU) prices are expected to rise as central banks diversify away from US Treasuries. China’s decision to impose export controls on key rare earth metals such as tungsten and molybdenum could disrupt the supply chain, further increasing demand for safe-haven assets. If China continues to limit access to these materials, industries reliant on them, such as clean energy and electronics, may face production challenges, reinforcing economic uncertainty. As a result, investors may turn to gold as a hedge against inflation and trade-related volatility.

The escalation of trade tensions suggests a complex interplay between currency markets, interest rates, and commodity prices. A stronger dollar could put pressure on US exporters but benefit importers. Meanwhile, higher gold prices signal rising risk aversion among investors. If trade negotiations deteriorate further, gold could continue to rally while the dollar strengthens, creating a challenging environment for global trade and economic stability.

Gold (XAU) Technical Analysis

Gold Daily Chart – Ascending Broadening Wedge

The daily chart for gold shows that the price has broken the green dotted line at $2,795, initiating a strong surge. After the breakout from $2,795, the target is the $3,000 price zone. The 50-day SMA and 200-day SMA indicate strong bullish momentum. The RSI is entering the overbought region, but ongoing economic uncertainty suggests continued momentum in the gold market.

Gold 4-Hour Chart – Ascending Channel

The 4-hour chart for gold shows that the price has broken out of the ascending channel, entering strong bullish momentum. The price has surged past $2,720 and $2,795, confirming the bullish trend.

Treasury Yields (TNX) Technical Analysis

10-Year Treasury Note Yield Daily Chart – Inverted Head and Shoulders

The daily chart for the US Treasury yield shows the formation of an inverted head and shoulders pattern. The price remains supported by the 50-day SMA. The correction from 4.80% suggests that the yield might find support soon for the next advance to 5%. The price action remains bullish, indicating further upside potential.

10-Year Treasury Note Yield 4-Hour Chart – Ascending Channel Pattern

The 4-hour chart for US Treasury yields shows that the yield remains within the ascending channel and is finding support at 4.45%. The RSI is dropping, indicating the potential for further decline, but the bullish bias on the daily chart suggests that US Treasury yields may find support soon.

US Dollar (DXY) Technical Analysis

UD Dollar Daily – Strong Volatility

The daily chart for the US Dollar Index shows strong volatility above the key level of 107. The emergence of a candlestick wick at the high of 110 suggests that the short-term direction might be lower. However, the strong fluctuations on the daily chart indicate ongoing economic uncertainty, which may drive increased volatility in the US dollar in the near future. The release of the NFP this Friday may provide further direction for the US Dollar Index.

US Dollar 4-Hour Chart – Volatile Zone

The 4-hour chart for the US Dollar Index also shows strong volatility within the ascending broadening wedge pattern. The orange zone highlights this area, and a breakout from this zone will determine the short-term direction of the US dollar. 107 and 105.60 remain key support levels for the US Dollar Index.