Gold Consolidates as the Market Monitors the Fed's Actions
On Tuesday, the price of gold (XAU) fell by 0.43% as the US Dollar Index (DXY) gained 0.28%. Market participants were assessing the timing of potential US interest rate reductions and seeking more clarity on US monetary policy.
This week's economic calendar features the University of Michigan's Consumer Sentiment Index report on Friday, as well as comments from several Federal Reserve (Fed) officials. The regulator is concerned about sticky inflation but doesn't plan to increase interest rates further and will consider cutting them if an opportunity arises. Not much is expected to change until the release of the US Consumer Price Index (CPI) data on 15 May. Should upcoming reports indicate an increase in inflation, the Fed will have to maintain high interest rates for longer, which would exert downward pressure on gold.
Minneapolis Fed Bank President Neel Kashkari said yesterday that it's too early to declare that inflation has stalled, and the Fed might cut interest rates this year if price pressures ease. Meanwhile, Richmond Fed President Thomas Barkin stated that the current level of interest rates is restrictive enough to cool the economy and bring inflation back to the 2% target. According to the CME's FedWatch tool, there is now a 65% probability of a rate cut in September.
XAU/USD rose during the Asian and early European trading sessions on Wednesday. The demand for safe-haven assets, driven by geopolitical tensions, uncertainty, and ongoing central bank interventions, could exert bullish pressure on XAU/USD. Today, several members of the Fed—Philip Jefferson, Susan Collins, and Lisa Cook—will deliver their speeches. Their comments could exert downward pressure on XAU/USD if the officials adopt a hawkish stance on US monetary policy.
Euro Declines as Fed Officials Sound Hawkish Again
On Tuesday, the euro (EUR) lost 0.15% as the US Dollar Index (DXY) continued to rise following hawkish remarks from one of the Federal Reserve (Fed) officials.
Neel Kashkari, Minneapolis Fed President, said yesterday that the central bank may need to hold borrowing costs steady for an 'extended period', possibly all year.
"There isn't any consistent trend here other than what we've seen, and that does not point to lower rates as much as various people in the market certainly, and maybe even some people in the Fed itself, would like", said Joseph Trevisani, the senior analyst at FX Street.
Additionally, traders noted a lot of selling interest in the 1.08000 area, which also might have contributed to EUR/USD's decline.
Fundamentally, the divergence in interest rate expectations between the Fed and the European Central Bank (ECB) still favors the US dollar. Thus, the fundamental pressure on EUR/USD is bearish as the market expects the ECB to cut its base rate before the Fed does. According to interest rate swap market data, traders are currently pricing in a near 100% probability of a 25-basis point rate cut by the ECB in June. In contrast, the Fed is not expected to ease its monetary policy until September.
EUR/USD was falling during the Asian and early European trading sessions. Today's economic calendar features no major events that could significantly impact the EUR/USD exchange rate. However, several Fed officials will deliver speeches later today at 3:00 p.m. UTC and 5:30 p.m. UTC. Traders will be watching for new clues about the future path of US interest rates that may determine the next significant move in EUR/USD.
British Pound Declines Ahead of BOE Interest Rate Decision
The British pound (GBP) decreased by 0.44% on Tuesday due to a stronger US dollar (USD).
Yesterday, Minneapolis Fed President Neel Kashkari emphasised that it is too early to confirm that inflation has stalled and suggested that rate cuts could occur this year if price pressures ease. Meanwhile, Richmond Fed President Thomas Barkin believes that current rates will help tackle inflation and that the Fed can be patient due to strong job data. However, both officials highlighted the need for more data before any rate cuts. Anticipations of a rate cut by the Fed remain steady: a reduction isn't expected in June, while the chances of a decrease in September now stand at 65%, according to the CME FedWatch Tool.
Meanwhile, the British pound (GBP) decreased as investors focused on the upcoming monetary policy meeting. The Bank of England (BOE) is expected to keep interest rates steady at 5.25%. However, assumptions that the BOE might cut interest rates before the Fed does are weighing on GBP/USD. Last month, Central Bank Governor Andrew Bailey mentioned that he was comfortable with market expectations of two or three rate cuts this year.
GBP/USD was falling during the Asian and early European trading sessions. Today's trading session is likely to be relatively quiet as the economic calendar features no major news releases. However, the BOE will deliver its interest rate decision tomorrow at 11:00 a.m. UTC, possibly affecting the British pound. Goldman Sachs has revised their GBP forecasts from 1.30000 to 1.24000 over the next three months. Goldman Sachs notes that the changes are due to the less dovish US economic outlook:
"With hawkish policy repricing driving markets recently, the pro-cyclical backdrop for GBP is less supportive than it was earlier in the year".