Gold, Currencies Weaken after PBOC Cuts Key Interest Rate

Gold, the Euro and the British Pound traded lower on Tuesday after China’s central bank cut its key interest rate in a bid to boost growth in the world’s second-largest economy. The move erased most of yesterday’s losses in the U.S. equity indices, pressuring the safe haven Euro and gold markets. The British Pound fell as a result of the stronger dollar.

Besides the turbulence created by China’s financial markets, global investors have also been reacting to the possibility the U.S. Federal Reserve will refrain from an interest rate hike in September. In the U.K., Barclay’s is saying the Fed will wait as long as March before hiking rates for the first time since 2006.

Those still looking for a September hike welcomed encouraging data showing that U.S. consumer confidence rebounded this month. Keep in mind, however, that this is stale data and does not reflect the recent steep drop in the stock market. Another report showed sales of new U.S. homes rebounded in July after a weak June reading.

Desperate to stop the slide in its stock market and to help stimulate the economy, the People’s Bank of China cut its interest rate for the fifth time in nine months. The PBOC lowered the benchmark rate for a one-year loan by 0.25 percentage points to 4.6 percent and the one-year rate for deposits by a similar margin to 1.75 percent.

The central bank also increased the amount of money available for lending by reducing the minimum reserves banks are required to hold by 0.5 percentage points.

Today’s moves by the PBOC are being perceived as short-term solutions to the recent volatility. Traders believe the country faces a long period of uncertainty that will continue to produce volatile swings in stock, commodity and foreign currency markets.

In other news, the German Business Climate report showed a reading of 108.3 versus an estimate of 107.6. This report had a minimal effect on the price action.

The Conference Board’s Consumer Confidence Index showed a reading of 101.5 versus an estimate of 92.8 and well above the last reading at 91.0. New Home Sales were up 507K new units. This was below the 512K estimate, but much better than the last reading of 481K.

On Wednesday, investors will get the opportunity to react to the latest U.S. Durable Goods report. In addition, FOMC Member Dudley is scheduled to speak.

Oversold conditions helped boost crude oil futures after the market traded under $39 a barrel for the first time since 2009. Traders expect Wednesday’s U.S. Energy Information Administration’s weekly report to show a rise of 1.9 million barrels.