Gold Drops as US Stock Indices Collapse Amid Recession Fears
The gold (XAU) price fell by 1.34% on Monday due to the main US indices collapsing and dragging down other assets, as investors feared a possible recession.
On Monday, major US stock indices finished the day significantly lower as concerns about a US recession shook global markets and prompted investors to flee from risky assets.
The unwinding of Japanese yen carry trades and escalating tensions in the Middle East further exacerbated the sell-off.
The sudden drop also intensified expectations for multiple rate cuts by the Federal Reserve (Fed), with markets now pricing in over 100 basis points (bps) of total easing this year and predicting a significant 50-bps rate cut in September.
Yesterday, San Francisco Fed President Mary Daly expressed her openness to cutting interest rates if necessary, emphasizing the importance of a proactive policy approach.
Joseph Lavorgna, managing director and chief economist at SMBC Nikko Securities, stated in an investor note: "There is some growing concern that the Fed could cut interest rates inter-meeting. This is unlikely because 1) it would look like a panic move, 2) Chair Powell can prep the markets for a big rate cut of at least 50 bps on 23 August at Jackson Hole, 3) anything that potentially further weakens the dollar could exacerbate the unwinding of the Yen carry trade."
Consequently, the first easing is still most likely to happen at the 18 September FOMC meeting, which is also when the Fed provides updated economic and financial forecasts.
XAU/USD stabilized at the $2,410 level in the Asian trading session. The formal macroeconomic calendar is rather uneventful today, so XAU/USD may remain under technical bearish pressure.
Gold's long-term bullish bias remained intact, supported by some fundamental growth drivers. They include ongoing global economic uncertainty, geopolitical tensions, inflation hedging, dovish central bank policies, and a weaker US dollar.
"Spot gold may retrace into a range of $2,372 to $2,384 per ounce, as the drop from the 2 August high of $2,477.54 looks incomplete", said Reuters analyst Wanf Tao.
Euro Rollercoaster: Market Uncertainty Keeps Traders Worried
EUR/USD faced high volatility yesterday, fluctuating within a wide 1.08940–1.10090 range as growing concerns over the potential US recession triggered a sell-off in the US Dollar Index (DXY).
Following the release of weaker-than-expected US jobs report last Friday, which showed unemployment rising to a 2.5-year high, investors started anticipating more rate cuts by the Federal Reserve (Fed) later this year.
They now price in a 73% probability of a 50-basis point (bps) cut in September, whereas the European Central Bank (ECB) is only expected to deliver a 25-bps rate reduction next month.
Despite a fundamental divergence in monetary policy expectations between the Fed and the ECB, the bullish impulse in EUR/USD weakened by Monday evening, and the pair closed the day below the critical 1.09650 level.
However, the sharp reversal of Monday's move doesn't indicate calmness in the market, and more volatility may be ahead.
EUR/USD was falling during the Asian and early European trading sessions. Two economic reports could influence EUR/USD today: German industrial orders at 6:00 a.m. UTC and the eurozone retail sales at 9:00 a.m. UTC.
Although neither of the reports is critically important, they might still add to the volatility, given how jumpy the financial markets have become lately.
Strong readings could strengthen the EUR/USD. Conversely, weak figures could exacerbate concerns about the eurozone growth, exerting downward pressure on the pair.
Bullish Momentum in Canadian Dollar has Weakened
Yesterday, USD/CAD rose and touched the 1.39500 resistance level, but then the bullish momentum weakened, and the pair lost 0.33%.
The outlook for Canadian manufacturing activity remains challenging, increasing the probability that the Bank of Canada (BOC) may continue its rate reduction cycle.
The Canadian Manufacturing Purchasing Managers' Index (PMI) fell towards 47.8 in July—the most significant PMI contraction since December.
The indicator has been declining for 15 months due to decreased output and new orders amid inflation concerns. Additionally, preliminary data indicated that the Canadian Gross Domestic Product (GDP) growth rate was only 0.1% in June, following a 0.2% rise in May.
Last week's lower-than-anticipated US employment data and disappointing earnings reports from major technology companies triggered a global sell-off in stock markets and high-yield currencies.
On Monday, the withdrawal from riskier assets took an unexpected turn, with stock markets plunging as concerns about a potential US recession intensified. The economists from Harris Financial Group anticipate that such sales will soon end.
Meanwhile, US central bank officials opposed the idea that the weaker-than-expected July employment data hinted at a recession. Still, they warned that the Federal Reserve (Fed) may need to lower interest rates to prevent such a scenario.
Traders now anticipate a 109-basis-point (bps) reduction in interest rates this year from the Fed, with a 75% probability of a 50-bps decrease in September, according to the CME FedWatch tool.
"Despite these developments, we maintain a degree of caution and do not expect any overreaction from central bankers", says Christian Scherrmann, US economist at DWS group.
USD/CAD has attempted to recover some losses during Asian and early European trading sessions. Today's Canadian Trade Balance report will come out at 12:30 p.m. UTC. The market expects a trade deficit of $2,000 (CAD) million in June.
If the actual number exceeds expectations, it will support the Canadian dollar (CAD), while a lower-than-expected reading could exert downward pressure on the currency.