Gold Continues to Move Higher as Traders Await Key U.S. Economic Data
Gold (XAU) price rose 0.65% on Tuesday as the US Dollar Index (DXY) weakened and Treasury yields went down.
Investors are buying gold as there are fewer incentives for people to get rid of it, with the market betting that the Federal Reserve (Fed) will cut interest rates before they achieve their 2% inflation target', said Bart Melek, head of commodity strategies at TD Securities. Indeed, according to the CME FedWatch Tool, the probability of a rate cut in March 2024 has now increased to 77%. However, strong U.S. macroeconomic reports can still change investors' expectations and provoke a bearish correction in XAU/USD. In fact, investors' expectations are currently extremely one-sided, meaning that too much faith has been put into the Fed's dovish stance. According to the interest rate swaps market, investors are pricing in as much as 150 basis points (bps) worth of rate cuts by the end of December 2024. That may be a very optimistic assessment of the Fed's monetary policy plans. Therefore, gold bulls should be very careful.
XAU/USD was rising marginally during the Asian and early European sessions. Today, traders should focus on the release of the Conference Board's Consumer Confidence report, due at 3:00 p.m. UTC. The report may add more clarity on the Fed's interest rate path. If it comes out stronger than expected, gold price will most likely correct to the downside—possibly below 2,030. However, a worse-than-expected report may increase the chances of an interest rate cut and thus may push XAU/USD higher. 'Spot gold may retest resistance of $2,044 per ounce, a break above which could open the way towards a range of $2,053–$2,062', said Reuters analyst Wang Tao.
Pound Drops on Lower-than-Expected CPI Data
The British pound (GBP) rose 0.7% on Tuesday but lost most of its gains during the early European session today as the U.K. Consumer Price Index (CPI) came out lower than expected.
Earlier today, the U.K. Office for National Statistics revealed that British headline inflation fell to just 3.9%, the lowest level in more than two years. The CPI was lower than the market predicted and has immediately increased the likelihood that the Bank of England (BOE) will cut interest rates next year. Investors already price in more than 100 basis points (bps) worth of rate cuts by the end of 2024. However, their outlook on the BOE is not as dovish compared to the Federal Reserve (Fed). Therefore, the divergence between U.K. and U.S. monetary policies continues to favor the pound, but less than previously. Some analysts, however, believe that BOE will continue to remain hawkish. 'Today's inflation data will bolster the Bank of England's argument that it remains too early to consider cutting interest rates, particularly with core inflation significantly above levels consistent with the inflation target', said Yael Selfin, chief economist at KPMG UK.
The next event, which might trigger some volatility in GBP/USD, is the release of the Conference Board's Consumer Confidence report, due at 3:00 p.m. UTC. It is not a critically important report but can still affect investors' interest rate expectations. If the report shows that U.S. consumers' sentiment remains strong, GBP/USD may continue to fall—possibly towards 1.26000. The short-term technical bias is bearish as GBP/USD trades below 1.27000, the important intraday level.