Gold Declines From Record Highs Despite Falling US Dollar and Treasury Yields
The gold (XAU) price retreated from record highs on Friday despite declining US dollar and Treasury yields. This movement followed the US nonfarm payroll (NFP) report, which showed that far fewer jobs were added in July than anticipated.
On Friday, data revealed that the US economy added 114,000 jobs in July instead of the expected 175,000. Additionally, the unemployment rate unexpectedly rose towards its highest level since 2021, and wage growth slowed more than anticipated.
Weak manufacturing data foreshadowed this drop in the nonfarm payrolls, with the ISM Manufacturing Purchasing Managers' Index (PMI) showing a larger-than-expected contraction in factory activity.
Markets now see almost an 80% chance of a 50-basis-point rate cut by the Fed in September, with approximately 155 basis points of total easing expected this and the following year.
Equities and commodity markets fell following the NFP report. The latest data indicates that the US economy is slowing down due to high interest rates.
Although the Federal Reserve (Fed) didn't cut rates at its policy committee meeting this week, Fed Chair Jerome Powell suggested that a cycle of rate cuts could start in September.
This led to a sharp drop in the US dollar and Treasury yields, which is bullish for gold—an asset that doesn't yield any interest. Additionally, escalating tensions in the Middle East continue to bolster demand for safe-haven assets like gold.
XAU/USD rose during the Asian and early European trading sessions. The US ISM Services PMI data will come out at 2:00 p.m. UTC today. A higher-than-expected number will put downward pressure on XAU/USD, while lower-than-anticipated figures might suggest a bullish outlook for gold.
"Spot gold may revisit its 2 August low of $2,410.64 per ounce, as a correction from the same day high of $2,477.54 looks incomplete", said Reuters analyst Wang Tao.
The Euro Soars on US Recession Fears
The euro (EUR) jumped by 1.08% against the US dollar (USD) on Friday after a weaker-than-expected US nonfarm payrolls (NFP) report. The data raised expectations for more interest rate cuts by the Federal Reserve (Fed) in 2024.
The US Dollar Index (DXY) dropped to a four-month low on Friday, pulling other major currencies higher. The decline happened as a disappointing jobs report triggered serious recession worries, prompting investors to sell US stocks and flock to safe-haven bonds.
"This is what a growth scare looks like. The market is now realising that the economy is indeed slowing", said Wasif Latif, president and chief investment officer at Sarmaya Partners in Princeton.
Indeed, according to the CME Group's (NASDAQ:CME) FedWatch Tool, traders are now pricing in an 81% probability that the Fed will cut rates by 50 basis points (bps) in September, up from 31% before the NFP data was released.
Meanwhile, the European Central Bank (ECB) is not expected to be as aggressive as the Fed because of the still relatively high inflation in the eurozone.
The latest interest rate swap market data indicates that investors are currently pricing in no more than 80 bps worth of rate cuts by the ECB and roughly 120 bps of cuts by the Fed by the end of 2024.
As a result, the divergence in monetary policy expectations between the two central banks has widened further, supporting the EUR/USD exchange rate. Still, it may be too soon to expect rapid rate reductions by the Fed based on a single NFP report.
The developing bullish trend in EUR/USD may prove to be rather fragile if the data doesn't confirm relative strength in the underlying eurozone economy.
EUR/USD was rising slightly during the Asian and early European trading sessions. The key event to watch today is the release of the US ISM Services Purchasing Managers' Index (PMI) due at 2:00 p.m. UTC.
Given that the market has confirmed its rate cut expectations, every report will be important to watch as it could significantly impact investors' sentiment and market volatility. If the PMI figures are higher than expected, EUR/USD will almost certainly correct downwards.
Conversely, a weaker-than-expected report may slightly pull the pair higher. As the number of longs in EUR/USD increases, the risk of a downward correction strengthens.
Australian Dollar Continues to Decline
On Friday, AUD/USD moved within the 0.64900–0.65400 range but finished the day below the important support level of 0.65000.
The Australian dollar (AUD) continued to trade below 0.65000, remaining near a three-month low. Concerns about a potential US recession, fuelled by a weak US employment report, affected AUD/USD and led to a sell-off in risk assets.
Also, expectations that the US Federal Reserve may need to cut interest rates more aggressively to stimulate the economy supported by the Australian dollar.
Currently, markets are pricing in a 93% probability of a larger rate reduction of 50 basis points in September, according to the CME Fedwatch tool.
At its upcoming two-day meeting, participants in the market anticipate that the Reserve Bank of Australia (RBA) will maintain interest rates at 4.35% for the sixth time. Therefore, the market will focus on the economic projections and the decision whether to increase rates.
While the Board of the Reserve Bank will consider the latest inflation data, there is no need for a change in its recent policy outlook. Gareth Aird, the head of Australian Economics at the Commonwealth Bank of Australia, said it's premature to change the tone now.
AUD/USD has been bearish during Asian and early European trading sessions, breaking below the 0.64800 support level. The US ISM Services Purchasing Managers' Index (PMI) data will come out today at 2:00 p.m. UTC.
A higher-than-expected reading may put bearish pressure on AUD/USD, while a lower-than-expected reading may give the pair bullish momentum.