Gold Stays Below 2,340 Ahead of Wednesday's Fed Interest Rate Decision
The gold (XAU) price rose in the first half of Friday's trading session. XAU/USD then reversed near 2,352 due to better-than-expected US Personal Consumption Expenditures (PCE) Price Index data and finished the day with a gain of only 0.23%.
Although the US PCE Price report revealed growth month-on-month as expected, hopes for early interest rate cuts this year decreased due to persistent inflation. Annual headline inflation accelerated to 2.7%, while the annual core rate remained at 2.8%, contrary to forecasts of a slowdown to 2.6%. Therefore, the probability of an interest rate cut by the Federal Reserve (Fed) this summer has decreased.
However, fears of a Chinese yuan (CNY) devaluation may enhance local buying of gold in mid-2024.
"A structurally stronger consumption trend via the retail and People's Bank of China channel is supportive of a higher gold price floor, boosting the base case for $3,000 per ounce of gold over the next 12–15 months," Citi researchers wrote in a note.
XAU/USD was trading sideways during the Asian and early European trading sessions. Today's German Consumer Price Index (CPI), due at 12:00 p.m. UTC, may push XAU/USD lower. However, the market will mainly focus on Wednesday's Fed monetary policy meeting and Friday's US Nonfarm Payroll data for further clues on the interest rate trajectory. The Fed is expected to hold its benchmark interest rate steady at 5.25%–5.5% at this meeting.
"We've seen quite a significant repricing of rate expectations in the US, and that's kind of a benchmark for global interest rates," said Jarrod Kerr, the chief economist at Kiwibank.
He added,
"I think the Fed this week will kind of echo those comments that rate cuts aren't as close as they had hoped".
Higher interest rates reduce the appeal of holding non-yielding gold.
The Euro Drops After Higher-Than-Expected US PCE Data
The euro (EUR) decreased on Friday after hitting an 11-session high, following higher-than-expected US Personal Consumption Expenditures (PCE) Price Index figures.
The euro has been strengthening since 16 April despite better-than-expected US economic data. The US PCE inflation rate increased by 2.7% year-over-year in March, compared to 2.5% previously. The rise signals persistent inflationary pressures, making the chances of interest rate cuts less likely. According to the CME FedWatch tool, the probability of a rate cut by the Federal Reserve (Fed) at the July meeting has fallen from 50% to 30%. Nevertheless, traders now price in a nearly 58% chance of a cut at the September meeting. Expectations of a more hawkish policy from the Fed could potentially strengthen the US dollar (USD) and cap EUR/USD gains in the near term.
Meanwhile, the European Central Bank (ECB) emphasized that inflation was cooling and indicated that it might cut interest rates before the Fed does. ECB President Christine Lagarde hinted at lowering the deposit rate from its record high of 4% in June while maintaining flexibility for future policy decisions. This week will be full of data releases that may affect EUR/USD. Key events include the eurozone Consumer Price Index and Gross Domestic Product for Q1, as well as US reports: ADP, JOLTS, and Nonfarm Payroll. The data may shift economic outlooks, affecting the EUR/USD exchange rate.
EUR/USD rose during the Asian and early European trading sessions. Today, traders should focus on the German inflation reports. Each German state will publish its own Consumer Price Index (CPI) data starting at 8:00 a.m. UTC, with the final report to be released at 12:00 p.m. UTC. If the inflation figures are higher than expected, investors will have to readjust their dovish rate cut expectations, and EUR/USD will rally. Conversely, lower-than-expected CPI numbers will likely extend the bearish trend and pull the pair towards 1.06000.
Hot US Inflation Lifts USD, Putting GBP Under Bearish Pressure
The British pound (GBP) faced downward pressure on Friday as the US dollar (USD) rebounded due to higher-than-expected US Personal Consumption Expenditures (PCE) Price Index figures.
The US Federal Reserve (Fed) is expected to maintain the interest rate in its current 5.25%–5.5% range at its monetary policy meeting on Wednesday. The US economy continues to show resilience, with rising inflation. On Friday, the Bureau of Economic Analysis reported that the core PCE numbers increased by 2.8% year-on-year in March. This data has fuelled speculations that the Fed may not cut the base rate until September.
The U.K. economic outlook has improved despite the Bank of England (BOE) maintaining high interest rates. April's preliminary Purchasing Managers' Index report indicated that robust service sector activity drives overall growth despite Manufacturing PMI lagging. New business inflows in the services sector remained strong, boosting employment and wages and potentially fuelling inflation pressures. BOE policymakers are concerned about 6% service inflation, complicating efforts to reach the desired 2% target. Conversely, investors have strengthened their expectations that the regulator will lower borrowing costs at the June meeting. BOE Governor Andrew Bailey's recent comments, suggesting that two or three rate cuts this year aren't 'unreasonable', reinforced these expectations. If the central bank adopts a dovish stance, it may weaken GBP/USD and act as a headwind for the pair, especially when combined with other macroeconomic factors.
GBP/USD reached 1.2540 during the early European trading session as the US dollar weakened. Today, the economic calendar is relatively light. This week's key events are the US Federal Reserve interest rate decision on Wednesday at 6:00 p.m. UTC and the US Nonfarm Payroll report on Friday at 12:30 p.m. UTC. The data will outline the future of US monetary policy. Any hints of a dovish stance will put downward pressure on the US dollar and push the British pound higher. However, if officials suggest that interest rates should remain higher for longer, a rate cut by the BOE may exert bearish pressure on GBP/USD.