Gold (XAU/USD) continued setting new record highs last week. XAU/USD rose by about 1.6% for the week, supported by the Federal Reserve's (Fed) significant 50-basis-point (bps) rate cut and China's recent stimulus measures.
The Fed's preferred inflation measure, the core Personal Consumption Expenditures (PCE) Price Index, rose by just 0.1% in August, below the 0.2% forecast, while the annual increase of 2.7% met expectations. Personal income and spending were also weaker than expected last month.
According to the CME FedWatch Tool, traders are pricing in a 55.7% chance of a 50-bps cut in November and a 44.3% likelihood of a 25-bps cut. However, St. Louis Fed President Alberto Musalem stated on Friday that the US central bank should return to a gradual pace of rate cuts following the larger-than-usual half-point reduction in September.
A combination of factors should help limit deeper losses. Israel intensified its conflict with Iran's allies—the Houthis in Yemen and Hezbollah in Lebanon—launching aggressive airstrikes on Sunday, raising fears of a broader war in the Middle East. Investors are now worried that the conflict could escalate, potentially drawing in Iran and the US, Israel's key ally. Overall, the possibility of further interest rate reductions and ongoing geopolitical uncertainty lowers the opportunity cost of holding non-yielding gold and supports safe-haven demand for gold.
Powell's Speech Key for Gold
XAU/USD declined during the Asian trading hours. Fed Chair Jerome Powell will give a speech today at 5:55 p.m. UTC, which may affect expectations for a rate cut in November. If Powell signals a more dovish stance or hints at further rate cuts, it could weaken the US dollar (USD) and push XAU/USD higher. Conversely, if he suggests a more cautious approach or less aggressive easing, it will put downward pressure on the pair.
"Spot gold may retest support at $2,646 per ounce, a break below which could open the way towards the $2,619 to $2,633 range", said Reuters analyst Wang Tao.
The Euro Strengthens as US Inflation Slows
The euro (EUR/USD) lost 0.12% against the US dollar (USD) during a rather volatile session on Friday. The US Personal Consumption Expenditure (PCE) Price Index report figures were slightly lower than expected, weakening the greenback.
Friday's US Bureau of Economic Analysis report showed that consumer spending rose slightly less than expected in August. However, the data didn't significantly alter the belief that the US economy continued to expand robustly in Q3. Importantly, the annual increase in prices was the lowest in over three and a half years, strengthening the case for more rate cuts by the Federal Reserve (Fed) and putting downward pressure on the US Dollar Index (DXY). At the same time, a big 50-basis-point (bps) rate cut is probably less likely given that there is no emergency to ease monetary policy against the backdrop of a still-growing economy.
Meanwhile, the market is beginning to anticipate more rate cuts from the European Central Bank (ECB). On Friday, Goldman Sachs said it now expects the ECB to deliver its next interest rate cut in October. The Wall Street brokerage also maintained its forecast for sequential 25-bps cuts at every meeting until the base rate reaches a terminal rate of 2%.
EUR/USD was rising during the Asian and early European trading session. Today, EUR/USD may face another volatile trading session as two important events are on the horizon. First, Germany will release its preliminary Consumer Price Index (CPI) report for September at 12:00 p.m. UTC. In case it indicates a slowdown in inflation, EUR/USD will probably drop towards 1.11000.
Second, Jerome Powell, the Chairman of the Fed, will deliver his speech at 5:55 p.m. UTC, during which he might give the details of future changes in the US monetary policy. Specifically, traders will be looking for clues about whether the Fed's Chair is leaning towards a 25- or a 50-bps rate cut in November. If Powell sounds less dovish than expected, the DXY may rise above the important 101.00 level, pushing EUR/USD down.
Australian Dollar Reached Its Peak Since the Beginning of the Year
AUD/USD continued its bullish trend on Friday, driven higher by a combination of macroeconomic and domestic factors.
The Reserve Bank of Australia (RBA) maintained the cash rate at 4.35% at its September meeting and indicated that policy may be maintained at current levels for an extended period. This has led investors to focus on upcoming economic reports from Australia, including Retail Sales, Building Permits, and Trade figures, which will be released this week. Additionally, the stimulus measures implemented by China have boosted the demand outlook for Australia's largest trading partner, leading to an increase in the prices of commodities and currencies linked to commodities.
The US core Personal Consumption Expenditures (PCE) Price Index, a key indicator used by the Federal Reserve (Fed) to measure underlying inflation, increased by 0.1% month-over-month in August 2024. This was below market expectations for a 0.2% rise and a slowdown from the 0.2% increase in the previous month, aligning with the central bank's view that US inflation is decelerating. This development supports the argument for a more aggressive rate-cutting cycle by the Fed, as it indicates that inflation is under control. Joe Capurso, strategist at the Commonwealth Bank of Australia (OTC:CMWAY), commented on the situation:
"Inflation is under control, interest rates are going down, and this is good news for the global economic outlook and for risk-taking and commodity currencies such as the Australian dollar".
He also predicted that the trend for the US dollar over the next year or so will likely be downward. AUD/USD has been increasing during Asian and early European trading sessions. The pair has bounced back from the support 0.69000 level. Today, the market will await Fed Chair Jerome Powell's speech regarding future monetary policy at 5:55 p.m. UTC. If Powell indicates a possibility of a 25-basis-point rate cut, it may lead to a downward correction in the AUD/USD. Conversely, if he hints at more aggressive reductions, it could weaken the US dollar and benefit the Australian dollar.