Gold Dropped on Hawkish Remarks from Jerome Powell
Gold (XAU/USD) fell by 0.4% on Wednesday, following hawkish remarks by the Federal Reserve (Fed) Chair Jerome Powell at a press conference.
On Wednesday, the Fed delivered its first interest rate cut since early 2020, surprising markets with a 50-basis-point (bps) reduction to address easing inflation and a possible labor market slowdown. XAU/USD briefly reached the $2,600 level before pulling back following Jerome Powell's remarks. Powell stated that the central bank isn't hurrying to ease policy and emphasized that 0.5% cuts are not the ‘new pace’. He also noted that the era of ultra-low interest rates is unlikely to return, with the neutral rate expected to be notably higher than before.
The US dollar (USD) strengthened across the board, with the strongest buying activity observed against the Japanese yen.
Projections released after the Fed's two-day meeting revealed that a slim majority—10 of 19 officials—supported cutting rates by at least another 50 bps in the two remaining meetings this year. US Treasury yields and the USD declined following the rate decision, while gold, which typically benefits from lower rates, initially climbed 1.2% before losing those gains.
XAU/USD rose by 0.5% during the Asian trading hours. Today, traders will focus on another set of economic reports: Jobless Claims and Existing Home Sales. Weaker-than-expected results may trigger a minor bullish reaction in XAU/USD. However, reports indicating strong growth in the real estate sector and solid labor market may cause a sharp drop in the gold price.
Euro Faces Uncertainty Amid the Fed's Rate Cut and Economic Divergence
The euro (EUR/USD) gained 0.04% against the US dollar (USD) during a very volatile trading session on Wednesday after the US Federal Reserve (Fed) cut its base rate by 50 basis points (bps).
EUR/USD has been in a clear uptrend since the end of June 2024 as the divergence in monetary policy expectations between the European Central Bank (ECB) and the Fed began to expand. However, after the Fed's rate cut yesterday, there was doubt that the EUR would continue its rally for an extended period. The 1.12000 level now looks like a medium-term high, given that the eurozone economy is in a much bleak state than the US one.
During the press conference, Fed Chair Jerome Powell asserted that the economy is on solid ground and that a recession is unlikely. Indeed, the latest US macro data—notably, the retail sales and building permits—indicate that the US Gross Domestic Product (GDP) will probably expand in Q3. Therefore, while the market expects the Fed to pursue a dovish monetary policy, there is no urgency to do so.
Meanwhile, the ECB may be forced to deliver more rate cuts as industrial output continues to decline, while the annual inflation rate in key eurozone economies— France and Germany—has already dropped below the ECB target. As a result, EUR/USD may soon face bearish pressure as investors adjust their rate cut expectations.
EUR/USD fell sharply during the Asian trading session but completely recovered in the early European session. The key events today are the Bank of England (BOE) rate decision, the US Jobless Claims, and the Philly Fed Manufacturing Index report. Although the BOE decision may not directly impact EUR pairs, it may spark volatility in the midst of a European trading session. If US macro data is stronger than expected, EUR/USD may fall sharply again, possibly testing the 1.10725 support level. If the US data is weaker than expected, EUR/USD's rally may temporarily extend towards 1.11650.
Japanese Yen Grows After the FOMC Conference
Yesterday, the Japanese yen (USD/JPY) experienced high volatility after the Federal Reserve (Fed) interest rate decision and during a press conference. USD/JPY finished the trading day above 142.000.
The US dollar (USD) rose slightly in a volatile trading day following the Fed's decision on Wednesday to lower interest rates by 0.5%. The large rate cut was due to increased confidence that inflation would continue to decline towards the central bank's target of 2%. The Fed lowered the rate to a range of 4.75–5%, and policymakers expect the benchmark rate to fall by another 0.5% by the end of the year, 1% by 2025, and a final 0.25% in 2026, ending in a range of 2.75–3%. The US dollar initially fell following the Fed announcement but recovered some losses after Chairman Jerome Powell's comments at the press conference.
During the press conference, Powell stated that he doesn't foresee any indications of a recession or even a potential economic slowdown in the near future. He emphasized that the current economic conditions don't suggest the likelihood of a downturn, as growth is occurring at a steady rate, inflation is decreasing, and the labor market remains strong.
USD/JPY moved bullishly during Asian and early European trading hours. The pair rose towards the 144.000 resistance level but quickly pulled back. Today, the US Jobless Claims report comes out. Lower-than-expected numbers may give extra support to USD/JPY, while high figures will put bearish pressure on the pair.