Three key things to watch for in the week ahead

It might be the dog days of summer on this side of the earth, however, there are some big issues that could dominate the markets. Everything from the Republican Convention to reports that President Trump could circumnavigate the usual rules around vaccines to get a Covid-vaccine, one that is produced by UK scientists, out to the US public before the Presidential election, have the potential to move markets at this time of the year. It is also worth remembering that the world’s most powerful central bankers will hold a virtual Jackson Hole symposium later this week.  

1, Jackson Hole 

The market will want to know three things, firstly, will the Fed consider turning a blind eye to inflation and keep interest rates low even if prices rise above 2% in the coming years. Secondly, will the ECB add to its bond buying programme and could it do so before the end of the year. Thirdly, is the Bank of England considering negative interest rates in the near future? 

The interesting dynamic between the three major central banks is that, right now, the UK looks in better shape than the US and the EU. Firstly, its Covid-infection rate is much lower than the US and some if its European counterparts, secondly, its latest PMI data also outperformed expectations, and the UK did better than its European peers when it was released at the end of last week. Surely, this is enough reason for the pound to stage a comeback in the coming days. The pound slid at the end of last week, dropping from $1.3250 to $1.3080 vs. the USD, after the greenback made a decent resurgence as gold faltered and the market reassessed their outlook for the US economy. At the start of trading this week, GBP/USD is stabilising around $1.3085, which could be a springboard for a stronger recovery, especially if the second wave of the pandemic continues to touch the UK only lightly. The pound’s recovery could gather strength later in the week especially if BOE Governor Bailey dismisses the prospect of negative interest rates for the UK economy. $1.32 is a key level of resistance. It is worth noting that a drop in US jobless claims combined with an upgrade to US Q2 GDP, both released on Thursday, could ignite another dollar recovery, which may limit GBP gains in the short term. 

2, The Republican Convention 

Interestingly, the Democrats convention last week failed to lead to an upswing for Joe Biden in the polls ahead of the US Presidential election in November. Biden still has a substantial lead over President Trump in the national polls, at 50.6% vs. 42.1% for Trump, however, only a fool trusts electoral polls. It will be interesting to see if Trump comes out guns blazing this week. If he can pin-point policy – further tax cuts, a potential Covid vaccine before election day and an end to lockdowns - then we may see Trump’s support start to gather momentum and the stock market rally. In truth, as we have mentioned in previous notes, the biggest risk to the tech titans and their astonishing stock market rally is the Democrats taking a clean sweep of Capital Hill and the White House. If Trump can improve his ratings on the back of the Republican Convention, then we may see the US stock market continue its march into record breaking territory. 

3, What’s next for the gold price 

As the dollar’s fortunes have turned so too has gold’s, the yellow metal fell more than $20 in the latter half of last week. A few things have hurt gold: the dollar’s resurgence, stronger US economic data and fears that gold’s rally is outpacing its fundamentals have triggered its decline back below $2,000 per ounce. Interestingly, there was some strong buying interest around the $1,910 level at the end of last week, which suggests that a further decline in gold will not occur in a straight line. Part of gold’s rally has been driven by retail traders, and this sector of the market, which has become incredibly powerful during the pandemic, may want to aquire a slice of the yellow metal if we see further declines. Thus, we believe that any lurches lower for gold could be bought into in the coming weeks. Also, a reiteration of dovish messages from the world’s major central bankers at this week’s Jackson Hole symposium could also drive demand for gold. Thus, we do not believe that we have seen the end of $2,000 highs for gold quite yet. As a caveat, a rising dollar may trigger bots to sell gold, so watch out for the greenback if you are thinking of becoming a gold bug.