Gold Continues Setting Record Highs
Gold (XAU/USD) reached record highs on Monday as the US political uncertainty and Middle East tensions supported the demand for safe-haven assets.
Gold prices continue to find support from various factors despite the strength of the US dollar (USD). A projectile from Lebanon landed in an open area in central Israel, while Israel warned of further strikes against Hezbollah, particularly targeting the group's financial operations.
Last week, the European Central Bank (ECB) implemented its third interest rate cut this year, marking the first consecutive cut in 13 years, with more expected as the economy faces challenges. Weak inflation data from the U.K. has reinforced expectations of more aggressive rate cuts by the Bank of England, and the Federal Reserve is also expected to reduce borrowing costs further.
Meanwhile, opinion polls show Vice President Kamala Harris and former President Donald Trump in a tight race as the 5 November US presidential election draws closer. All these developments push the price of gold higher.
Meanwhile, traders are evaluating contrasting opinions from Fed officials regarding the future course of US monetary policy. Kansas City Fed President Jeffrey Schmid favours a more gradual approach to rate cuts, while San Francisco Fed President Mary Daly stresses the importance of additional cuts to safeguard the labour market. Rising concerns that a Donald Trump victory could lead to the introduction of more inflationary tariffs contributed to the overnight sell-off in US government debt.
XAU/USD rose by 0.46% during the Asian trading hours. Today, traders should focus on the release of the Richmond Manufacturing Index at 2:00 p.m. UTC. Lower-than-expected results will likely extend the bullish trend in XAU/USD. Conversely, strong figures may pause or even break the established trend.
Trump's Improving Election Odds and Fed's Stance Pressure EUR
The euro (EUR/USD) plunged by 0.47% against the US dollar (USD) on Monday as several Federal Reserve (Fed) officials said that they anticipated only a gradual reduction in interest rates.
The Kansas City and Dallas Fed presidents supported a cautious and gradual reduction in interest rates. They cited potential risks to the job market and the possibility of inflation rising again as factors influencing their position. This approach essentially means that the Fed may be more cautious in cutting rates in 2025. As a result, market expectations on US monetary policy shifted towards a more moderate easing phase, pulling the US Dollar Index (DXY) higher. Adding to the dollar's rally was the rising prospect of former President Trump winning the November presidential election since his proposed tariff and tax policies are seen as likely to keep US interest rates high.
Meanwhile, the economic situation in the eurozone is worse than that of the US, so the markets expect the European Central Bank (ECB) to deliver another 25-basis-point (bps) rate cut in December. Goldman Sachs, a major US investment bank, thinks a strong US economy and a dovish central bank in Europe will open spreads wider, with a target of 205 bps for the gap between German bunds and US Treasuries.
EUR/USD was rising slightly during the Asian and early European trading sessions. Today's macroeconomic calendar is rather uneventful, so the pair is unlikely to break out from its current bearish trend. Christine Lagarde, ECB President, will give a speech at 7:15 p.m. UTC today, which might potentially add volatility to EUR pairs, but no major announcements are anticipated.
Australian Dollar Holds on as the DXY Rallies
The Australian dollar (AUD/USD) tested the 0.66500 support level yesterday and lost 0.71% as the US dollar and Treasury yields rallied on signs that the US economy stayed resilient and rising odds of a Trump victory in the November election.
Treasury yields increased overnight as expectations for aggressive monetary easing by the Federal Reserve (Fed) in the near future have diminished. Traders expect the Fed to deliver only a total of 40 basis points (bps) of cuts over the rest of the year. This implies less than two 25-bps reductions from the central bank at November and December meetings. According to the CME FedWatch Tool, the probability of a 25-bps rate cut in November is now 88.5%.
"We think consecutive 25 bp cuts are quite likely in November and December, but we see more uncertainty about the pace next year", Goldman Sachs analysts said in a note. "In part because of the election and in part because if the growth data remains strong and the unemployment rate remains stable for a few months, the FOMC could consider slowing the pace at some point", they added.
Domestically, the Deputy Governor of the Reserve Bank of Australia (RBA), Andrew Hauser, said earlier this week that robust employment growth was a bit of a surprise. He also indicated that the central bank was prepared to respond in either direction, depending on incoming data. Last week, data revealed that Australia's economy added 64,100 new jobs in September, significantly exceeding forecasts of 25,000, with the unemployment rate remaining at 4.1%. Joseph Capurso, Commonwealth Bank of Australia's head of international economics, remarked that recent developments don't constitute a sign of significant future declines in the Australian dollar value. Given the expectation of a less aggressive easing policy by the Fed, markets now only anticipate a 25% likelihood of a rate cut by the RBA this year. According to the RBA WATCH, a first reduction by the RBA next April is currently less fully factored into prices.
AUD/USD has been moving higher during Asian and early European trading sessions. Two significant events could significantly impact this pair this week: the US Jobless Claims report at 12:30 p.m. UTC on Thursday and the following US Manufacturing and Services Purchasing Managers' Index (PMI) for October at 1:45 p.m. UTC. These data releases will provide the market with insights into the Federal Reserve's future policy direction.