Gold Drops on Decreasing Chances of 50-Bps Fed Rate Cut
Gold (XAU) fell by 0.7% on Wednesday as the chances of a 50-basis-point rate cut in September by the Federal Reserve (Fed) decreased following the US Consumer Price Index report.
US consumer inflation eased towards 2.9% in July, slightly below the anticipated 3%, while the core inflation rate fell to a three-year low of 3.2%.
Although markets still expect the Fed to begin cutting rates at the next meeting in September, the rebound in monthly consumer inflation has tempered hopes for a more significant rate cut next month. This development also moderated the strong upward momentum in the gold price, pushing the non-yielding asset lower.
CPI data led to a late rebound in US Treasury bond yields, which helped the US dollar (USD) attract some buying interest at lower levels, putting pressure on the non-yielding gold.
The US Dollar Index (DXY) continues moving higher today, putting downward pressure on the commodity, though heightened geopolitical tensions support gold.
Mediators are working to initiate ceasefire talks between Israel and Hamas amid the looming threat of an imminent Iranian attack on Israel in the coming days.
XAU/USD rose slightly during the Asian trading sessions. Today, gold traders should prepare for extra volatility as the US will publish several macroeconomic reports:
Retail Sales, Jobless Claims, and Manufacturing Indices for Philadelphia and New York will be released at 12:30 p.m. UTC.
These data could trigger sharp moves in all USD pairs, affecting XAU/USD. Gold bulls hope for worse-than-expected figures—a drop in core retail sales or a significant rise in unemployment claims.
Data indicating weakness in the US economy increases the chances for an interest rate cut and may drive XAU/USD higher. Otherwise, the bearish trend in gold may continue.
"Spot gold may retest support at $2,441 per ounce, a break below which could be followed by a drop into $2,418 to $2,429 range", said Reuters analyst Wang Tao.
Euro Stays Bullish on Soft US Inflation Data
EUR/USD rose on Wednesday, and the release of US Consumer Price Index (CPI) data provided additional bullish momentum for the pair. The euro reached the 1.10500 resistance level and then experienced a pullback towards 1.10000.
The annual inflation rate in the US slowed for a fourth consecutive month towards 2.9% in July 2024—the lowest since March 2021—below the forecasted 3%.
The figures support the mild increase in producer prices in July, suggesting that inflation may be trending downwards. However, traders now expect the Federal Reserve (Fed) to be less aggressive in its rate cuts than anticipated.
The market prices in a 63.5% probability of a 25-basis-point (bps) cut and a 36.5% probability of a 50-bps reduction at the September meeting, according to the CME FedWatch Tool. At the beginning of this week, chances were evenly divided between these two options.
Mansoor Mohi-Uddin, Chief Economist at the Bank of Singapore, predicts that the Fed will reduce interest rates with cuts by 25 bps, which would benefit risk assets.
"We anticipate further reductions in September and December, with the possibility of another reduction in November, if the US labor market continues to weaken this year".
The focus is now on the US retail sales figures, which will be released later today.
EUR/USD has been trading sideways during the Asian and early European sessions, building up momentum for a potential move. The US Retail Sales data will be released today at 12:30 p.m. UTC.
Strong figures could potentially push EUR/USD down towards the 1.09500 support level. Meanwhile, softer-than-expected numbers could push the euro up to retest 1.10500.
Japan's Strong GDP Data Reinforces JPY's Bullish Outlook
The Japanese yen (JPY) lost 0.33% against the US dollar (USD) on Wednesday despite the US inflation figures being slightly lower than expected.
Yesterday's data showed that the US Consumer Price Index (CPI) increased slower in July, with annual inflation dropping below 3% for the first time in nearly four years.
This development strengthened expectations that the Federal Reserve (Fed) will reduce interest rates during its next meeting.
"This report shows continued progress towards the Fed's inflation goals. Nothing in it would keep the Fed from cutting in September, but market hopes for a bigger cut still seem like a long shot", said Scott Anderson, chief economist at BMO Capital Markets.
Indeed, the market still prices in a 35% chance that the Fed will opt for a 50-basis-point (bps) rate cut in September, starkly contrasting with the Bank of Japan's (BOJ) stance on monetary policy.
The BOJ is the only major central bank that is expected not to cut but to increase the base rate in the months ahead. The latest interest rate swap market data implies roughly 10 bps or rate hikes by the regulator by the end of January 2025.
In theory, the divergence in monetary policy expectations should contribute to the narrowing of rate differentials, exerting a downward pressure on USD/JPY.
"The Fed is cutting rates. That should be US dollar negative. The currency that's probably still likely to do the best against the dollar is the yen", said Vassili Serebriakov, FX strategist at UBS.
Meanwhile, analysts noted that Japanese markets showed little reaction to Prime Minister Fumio Kishida's decision to step down in September and not seek reelection.
Earlier today, the Japanese Economic and Social Research Institute reported that the country's Gross Domestic Product (GDP) grew at an impressive annualised rate of 3.1% in Q2, far exceeding expectations and strengthening the case for interest rate hikes by the BOJ. Therefore, the bearish pressure on USD/JPY may soon reemerge.
USD/JPY was falling slightly during the Asian and early European trading sessions. Today, traders should focus on the US Retail Sales figures due at 12:30 p.m. UTC.
The market expects a 0.3% rise in monthly retail sales and a 0.1% increase in core sales figures. Lower-than-expected results will certainly put bearish pressure on USD/JPY and may push the pair below the 146.000 level.
Conversely, higher-than-expected figures may drive USD/JPY higher, but breaking above 148.000 may prove challenging.