Analysts: European turmoils could prevent Fed from raising rates

Referring to the gold market, analysts signal that the metal is now locked in the battle between the Greek turmoil and the Fed interest rates, with the latter winning the battle. However, another question has risen with respect to Greece: can the U.S. central bank actually lift rates if these turmoils threaten Eurozone falling apart?

After the referendum showed that the majority of the Greek people were against creditors' austerity measures, Capital Economics issued a report which put the possibility of Grexit above 50%.

BNP Paribas went even further putting the possibility of Greece exiting the euro at 70%. The institution said they are pushing back expectations of a rate liftoff from September to December.

Commodity analyst at BMO Capital Markets Jessica Fung said in an interview with Kitco News that given so much uncertainty in Europe, the Federal Reserve cannot afford to embark on a new rate hike cycle.

The single currency has dropped 7.8% since the beginning of the year and has been down more than 18% compared to 2014. The higher U.S. dollar has been damaging the U.S. economy, as lower exports has undermined the manufacturing industry.

“If Europe falls apart, the U.S. cannot hike rates. There is not enough strength in the global economy for them to do that. We know that for sure,” she said.

It is not only the U.S. which will be affected. China's economy is also sensitive to what is going on in Europe. The yuan has been rising against the euro which became a drag on China's exports, also damaging the country's manufacturing sector.

Fung told that investors should not underestimate the influence a Grexit could have on global financial markets because this is all unchartered territory.

“When Bear Sterns collapsed did anyone think that that would be the start of the financial crisis? We don’t know what the fall out of this is going to look like,” she said to Kitco News.

Bob Janjuah, market strategist at Nomura agreed with Fang saying that the turmoil in Greece will not be resolved soon and it would be a “major policy error” for the Fed to raise rates by September, as “any hikes by the Fed would add significant risk to markets, risk assets in particular.”