Gold (XAU/USD) fell 0.55% on Wednesday, marking its sixth straight session of losses ahead of the upcoming US Consumer Price Index (CPI) report.
The gold price recently dipped to its lowest point in nearly three weeks, pressured by fading hopes for more aggressive rate cuts from the Federal Reserve. The minutes from the latest FOMC meeting showed policymakers were split on whether to go for a 50-basis-points (bps) cut, with some favoring a smaller 25-bps reduction.
Officials' focus remained on confirming a sustained decline in inflation, showing less concern about the job market. This view was reinforced by last week's strong jobs report, highlighting labor market strength. Thus, investors started to price in an 86% probability of a 25-bps cut in November.
Meanwhile, Dallas Fed President Lorie Logan highlighted significant uncertainties in the economic outlook. At the same time, Boston Fed President Susan Collins emphasized that policy will stay data-driven and flexible to maintain healthy labor market conditions. Also, San Francisco Fed President Mary Daly suggested that one or two more rate cuts could occur this year but noted that September's 50-bps cut doesn't indicate the size of future reductions.
XAU/USD rose during the Asian trading session. Today, all eyes will be on the US CPI report due at 12:30 p.m. UTC, which could offer insights into the Fed's plans for the interest rate path. A Reuters poll of economists projects a 0.1% monthly rise in September's CPI, while core figures are expected to increase by 0.2%.
Figures exceeding these forecasts will almost certainly lower the probability of a large interest rate cut in November, potentially bringing XAU/USD below $2,600. Conversely, lower-than-expected CPI numbers will likely cause XAU/USD to rally, possibly towards $2,640.
Euro Is Under Bearish Pressure as the Market Eyes US Inflation Report
The euro (EUR/USD) lost 0.37% against the US dollar (USD) on Wednesday as investors largely ignored the relatively dovish FOMC minutes, and the US Dollar Index (DXY) reached a fresh two-month high.
Yesterday's FOMC Minutes of the Federal Reserve's (Fed) September meeting showed that most policymakers backed a large 50-basis-point (bps) rate cut last month. However, there was broad agreement that the initial move wouldn't commit the Fed to any particular pace of rate reductions in the future.
On Wednesday, traders also digested comments from the Fed officials and generally refrained from opening large positions ahead of today's release of the Consumer Price Index (CPI) report. Lorie Logan, Dallas Fed President, said she supported last month's outsized interest rate cut.
Still, she wants smaller reductions ahead, given ‘still-real’ upside risks to inflation and ‘meaningful uncertainties’ over the economic outlook. According to the CME FedWatch Tool, traders now see an 85% chance of a 25-bps rate cut in November and price in about 50 bps worth of reductions by February 2025. Now, the probability that the Fed will leave the rates unchanged next month stands at just 15%.
Meanwhile, a rate cut by the European Central Bank (ECB) next week looks more assured as policymakers press their case. On Wednesday, several ECB policymakers argued for another interest rate cut next week, mirroring market expectations. The latest interest rate swaps market data implies more than 60 bps worth of rate cuts by the ECB by February 2025. As a result, the divergence in monetary policy expectations, which previously favoured the greenback over the euro, has now dissipated. Thus, a bearish trend in EUR/USD may slow down.
EUR/USD edged up during the Asian session but resumed its decline during the early European trading hours. Today, the key event is the release of the US CPI report at 12:30 p.m. UTC. The market expects a 2.3% rise in headline inflation and a 3.2% increase in core CPI. Lower-than-expected figures will have a strong bullish impact on EUR/USD, potentially pulling it above 1.09600. Conversely, higher-than-expected numbers will likely extend EUR/USD's bearish trend towards 1.09100.
Canadian Dollar Increases Ahead of the US CPI Report
USD/CAD continued to rise on Wednesday. The pair broke above the 1.37000 resistance level and gained 0.47%, despite FOMC Minutes showing that a significant majority of policymakers supported a large 50-basis-point (bps) rate reduction.
Investors remained confident that the US central bank won't continue to ease monetary policy as aggressively as it had before. Last month's meeting minutes were viewed as outdated after Friday's robust Nonfarm Payroll report caused markets to adjust their expectations for near-term Federal Reserve (Fed) rate cuts. ‘The market has been anticipating the release of the minutes for the past few days now, along with the inflation report. As a result, the US Dollar Index has been trending upwards, and it is clear that the catalyst for this movement was the strong US jobs report’, said Amo Sahota, Executive Director at KlarityFX. Based on the futures market for federal funds, traders estimate an 83% probability of a 25-bps reduction in interest rates at the November meeting, with an additional 50 bps of cuts by the year-end, according to the CME FedWatch Tool.
The Canadian dollar (CAD) reached a near eight-week low against the US dollar (USD) on Wednesday, as oil prices declined and investors reduced their expectations for US interest rate cuts.
"It's a disappointing trend for the Canadian dollar", said Adam Button, chief currency analyst at ForexLive. "The majority of the movement has been on the US dollar side, as the market adjusts its expectations for the Fed", he added.
Investors eagerly await Canada's monthly employment report on Friday, which is expected to show an increase of 27,000 jobs in September. This data could help shape expectations for the Bank of Canada's policy decision this month. Investors anticipate the regulator to further ease interest rates on 23 October, with a 30% chance of a 50-bps cut.
USD/CAD continues to rise during Asian and early European trading hours ahead of US inflation data. The US CPI report will come out today at 12:30 p.m. UTC and likely cause increased volatility. Higher-than-expected figures should be taken as bullish for the USD/CAD, while weaker data may trigger a downward correction in the pair.