Gold Consolidates Ahead of Important US Reports
Yesterday, XAU/USD declined by 0.1% as Jerome Powell didn't provide investors with specifics about the timing of the interest rate cuts.
The gold market has been moving in a narrow range of 2,320–2,340 for the last three days. There is a strong accumulation, followed by an impulse exit from the corridor. Many analysts hope for a sharp XAU/USD rise due to the US elections. Yesterday, Fed Chairman Jerome Powell said that the US returned to the path of disinflation, but it was necessary to ensure that inflation figures give an accurate picture of the economy's health before cutting rates. The market is waiting for the most important employment US data—the Nonfarm Payroll (NFP) report, due to be published on Friday. The data can have a strong impact on the market, including gold.
"There's a clear path for gold to outperform from here, likely fuelled by Western flows. Conversely, in the event that central bank demand drops drastically, rates remain high for longer and Asian investor sentiment flips, we could see a pullback in the second half", the World Gold Council said in its mid-year outlook report.
Today, investors expect a string of US reports: ADP Employment at 12:15 p.m. UTC, Jobless Claims at 12:30 p.m. UTC, ISM Services PMI at 2:00 p.m. UTC, and FOMC Minutes at 6:00 p.m. UTC. The data will likely strongly impact XAU/USD. If the data is weaker than expected, the pair may rise towards 2,360. Still, XAU/USD may reach the low of 2,300 if US reports outperform forecasts.
Euro Moves Sideways Ahead of the Second Round of French Elections
The euro (EUR) was essentially unchanged on Tuesday, failing to break above the critical 1.07500 level despite the weakening US dollar.
Yesterday's dovish comments by Jerome Powell, the Federal Reserve (Fed) Chairman, offset the upbeat US labour market report and pushed the US dollar lower. However, the euro failed to gain additional ground despite the higher-than-expected eurozone core Consumer Price Index (CPI) numbers. The euro may remain weak because investors and traders are still uneasy about the outcome of the French Parliamentary elections. The second round of voting is scheduled for 7 July. France may face a period of intense political instability and unsustainable government spending, with negative implications for all EUR pairs. Fundamentally, there is not much of a divergence in monetary policy expectations between the Fed and the European Central Bank (ECB). Therefore, EUR/USD should probably move sideways in the short term, but political uncertainty will continue to exert downward pressure on the pair.
EUR/USD was essentially unchanged during the Asian and early European trading sessions. Today, traders will focus on four US reports: ADP Employment at 12:15 p.m. UTC, Jobless Claims at 12:30 p.m. UTC, ISM Services PMI at 2:00 p.m. UTC, and FOMC Minutes at 6:00 p.m. UTC. The data may significantly affect all USD pairs. If the reports come out stronger than expected, showing persistent tightness in the labour market and elevated business activity, EUR/USD will likely drop towards 1.07000. Otherwise, a minor bullish trend in EUR/USD may continue, but a break above 1.07800 is unlikely before the publication of the Nonfarm Payroll (NFP) report later this week.
Dovish Fed's Comments Support British Pound
The British pound (GBP) gained 0.29% on Tuesday as investors sold off US Dollar Index (DXY) after it failed to hold above the critical 106.00 level.
Even though yesterday's US jobs market report showed a strong increase in new job openings, US Treasury yields declined, pulling the US dollar (USD) lower. Most likely, yesterday's rally in GBP/USD was driven by two factors. First, traders decided to buy the British pound, hoping the pair would manage to hold above the support level of 1.26000. Second, the comments by Jerome Powell, the Chairman of the Federal Reserve (Fed), were treated as dovish and reinforced the prospect of an interest rate cut in September. Powell said that the US was back on a disinflationary path.
"Listening to some of his comments, it seems he's laying the groundwork for cuts maybe in September, that's where the market thinks they're going to start", said James St. Aubin, chief investment officer at Sierra Mutual Funds.
According to the CME FedWatch Tool, markets are currently pricing in a 65% chance that the Fed will ease its monetary policy in September. On the other hand, interest rate swap market data implies that the Bank of England (BOE) may cut the rates as early as 1 August before the Fed does.
GBP/USD was essentially unchanged during the Asian and early European trading sessions. Today, the US data is in the spotlight. Traders should focus on four reports: ADP Employment at 12:15 p.m. UTC, Jobless Claims at 12:30 p.m. UTC, ISM Services PMI at 2:00 p.m. UTC, and FOMC Minutes at 6:00 p.m. UTC. The data may significantly affect GBP/USD.
Meanwhile, investors in the U.K. are shifting their focus to the upcoming generation elections due on 4 July. The impact of these elections on the British pound will depend on several factors. Firstly, it is not clear how many votes the Labour Party will get and whether or not the country will end up with a hung Parliament. Investors will likely consider a decisive victory by the Labour Party as a positive factor, driving GBP/USD higher. On the other hand, the party may consider raising taxes, potentially weakening the currency. Exit poll results will probably be announced in the late American session on 4 July, a US federal holiday. Thus, traders should prepare for extensive volatility in GBP pairs during the early Asian session on 5 July.