Gold's Bull Run Stalls Amid Uncertainty Over Fed Policy
The gold (XAU/USD) price fell more than 1% on Thursday as the US Dollar Index (DXY) rebounded from a multi-month low. Meanwhile, US Treasury yields rose after the US macroeconomic reports largely met market expectations.
"We have an uptick in the two-year yields and an uptick in the dollar index. Gold has had an incredible run three sessions ago. It made new all-time highs, so it's natural for traders to take some profits on this type of move", said Phillip Streible, chief market strategist at Blue Line Futures.
Two Federal Reserve (Fed) officials advocated for a reduction in interest rates at the upcoming Fed meeting. In theory, lower interest rates make gold more appealing, as holding it wouldn't be as costly compared to other assets that pay interest.
Indeed, it's largely the market's expectations for lower interest rates that have driven XAU/USD up by more than 25% since mid-February. However, investors have already priced in a rather aggressive rate-cutting cycle by the Fed with an overall of 200 basis points reductions by 2026. Thus, there is doubt that the rally in gold can be sustained in the short term.
XAU/USD rose slightly during the Asian session but declined during the early European trading hours. Today, traders should focus on Jerome Powell's speech at the Jackson Hole Economic Symposium, due at 2:00 p.m. UTC.
"If Chair Powell can express greater confidence for a September rate cut, such dovish signals should trigger another spike for gold", said Han Tan, chief market analyst at Exinity Group.
Still, Powell may take a more cautious approach and provide only limited guidance on future rate cuts. In this case, XAU/USD may continue to fall but probably not below $2,445.
"Spot gold may retest support at $2,472, a break below which could cause a drop towards $2,434", said Reuters analyst Wang Tao.
Euro Moves Sideways Ahead of Powell's Speech
EUR/USD traded bearish on Thursday. The pair went into moderate correction towards the 1.11000 support level due to higher-than-expected US Composite Purchasing Managers' Index (PMI) data, eventually losing 0.35%.
The S&P Global US Composite PMI numbers fell slightly towards 54.1 in August, a four-month low from 54.3 in July but still above market expectations of 53.5. The US dollar (USD) recovered from a 13-month low against the euro on Thursday, ahead of today's Federal Reserve (Fed) Chair Jerome Powell's speech.
The US dollar has been declining due to concerns about a potential economic slowdown and expectations of the Fed's possible interest rate reduction. Brad Bechtel, global head of Foreign Exchange at Jefferies, stated that the US dollar had been under significant pressure but was now reaching a point where it had become significantly oversold.
Traders have now priced in a 25% likelihood of a 50-basis-point (bps) interest rate cut next month, down from 38% the previous day. Meanwhile, the chances of a 25-bps reduction stand at 75%, according to data from the CME FedWatch Tool.
Traders will closely monitor Powell's remarks at the Jackson Hole symposium today for any new insights into the US interest rate path. Powell may not provide extensive details in his remarks, given that the August jobs and inflation figures will be released after his speech, before the monetary policy meeting in September.
The Fed's July meeting minutes, released on Wednesday, indicated that a majority of officials supported a September reduction. Philadelphia Fed President Patrick Harker stated on Thursday that he supports a September rate reduction, provided that the data continues to perform as expected. Boston Fed President Susan Collins also supported this stance.
EUR/USD moved sideways during Asian and early European trading sessions, just below the 1.11300 resistance level. The pair will likely maintain its sideways dynamic today until Powell's speech at Jackson Hall at 2:00 p.m. UTC.
Bitcoin Awaits Powell’s Jackson Hole Speech
Bitcoin (BTC) moved sideways on Thursday after reaching $61,000 on Wednesday following the release of the Federal Open Market Committee (FOMC) minutes.
According to the FOMC minutes, the Federal Reserve (Fed) will likely ease monetary policy at its next meeting, contingent on upcoming data meeting expectations. The minutes also revealed that some policymakers favored a 25-basis-point rate cut at the July meeting. However, the Fed ultimately decided to keep rates unchanged.
As a result, the US Dollar Index (DXY) hit new lows for 2024. Fluctuations in the DXY can influence BTC, as a weakening US dollar (USD) often leads investors to turn to alternative assets like Bitcoin, driving its value higher.
On the other hand, global liquidity (M2) is on an upward trend. M2 represents the total money supply within the global economy, encompassing checking accounts, savings accounts, and other liquid assets that can be easily converted to cash.
Typically, risk assets like Bitcoin tend to correlate positively with increasing liquidity. The connection between Bitcoin's price and M2 rise signals broader market sentiment and economic conditions. It indicates a loose monetary policy and a growing money supply, often supporting risk assets such as cryptocurrencies. As Cryptonary noted,
"BTC is the most sensitive asset to liquidity. Historically, a 10% increase in global liquidity has corresponded to a 40% increase in Bitcoin's price".
BTC/USD rose during the Asian and early European trading sessions. Today, all eyes will be on Fed Chair Jerome Powell's speech at the Jackson Hole symposium due at 2:00 p.m. UTC.
Powell's comments may cause market volatility, particularly in risk-sensitive assets like Bitcoin. Unlike traditional trading instruments such as stocks and currencies, Bitcoin will continue to react to Friday's news events over the weekend.
This presents a good opportunity for cryptocurrency traders to take advantage of volatility without the usual correlation to traditional financial assets.
If Jerome Powell is dovish, Bitcoin could see a sharp rise. However, if Powell maintains his usual cautious stance regarding rate cuts, Bitcoin might correct downwards toward $58,000.