Fears of a recession are escalating as the USD gains in response to a triple miss and contraction in France, Germany, and the Eurozone Manufacturing PMIs, the first contractions in almost two years. Despite the eurozone economy suffering from the impact of Russia’s war in Ukraine, the European Central Bank joined worldwide counterparts in fighting skyrocketing inflation by raising interest rates by more than expected on Thursday. The central bank delivered a huge 50 basis point rate hike, versus the widespread consensus for a 25 basis point increase, and also hinted that rates will climb further in future meetings.
In addition, overnight hawkish comments by Bank of England Governor Andrew Bailey boosted betting on a 50 basis point rate hike in August, the largest since 1995. The Federal Reserve is also likely to hike interest rates by 75 basis points at its next policy meeting on July 26-27. Furthermore, the Reserve Bank of Australia signalled earlier this week that higher interest rates were needed to combat growing inflation.
A softer risk tone, on the other hand, will provide some support for the safe-haven gold. The recent rally in the equities markets fizzled out swiftly as the global economic picture deteriorated and recession concerns grew. When GDP for the April-June period is announced next week, it could be negative again, and two quarters of negative GDP growth would indicate that the United States is already in a recession.
Investors are concerned that fast rising interest rates, the Russia-Ukraine conflict, and China’s implementation of severe COVID-19 regulations may pose obstacles to global economy. As a result, investors’ appetite for risky investments will be waned and this will be supportive for precious metals.