Gold Awaits Fed's Interest Rate Decision
Gold (XAU/USD) traded within the range of $2,575–$2,590 on Monday as investors were cautious ahead of the Federal Reserve (Fed) meeting.
The New York Empire State Manufacturing Index for September posted a surprising increase towards 11.5, significantly outperforming the expected −3.9 and the previous month's −4.7. However, this stronger-than-anticipated result failed to invigorate the US dollar (USD) bulls, as market participants remain focused on broader economic factors, including the upcoming Fed interest rate decision this Wednesday. Despite the positive manufacturing data, concerns about the overall health of the US economy and uncertainty regarding the US interest rate trajectory keep traders cautious, limiting USD gains.
Last week, the yield on the 2-year US government bond, particularly sensitive to interest rate changes, dropped to its lowest since September 2022. The benchmark 10-year US Treasury yields also declined to their lowest since June 2023. Some repositioning ahead of the Federal Open Market Committee (FOMC) policy meeting, which will begin later today, helped the US dollar recover from its year-to-date low. The CME FedWatch Tool indicates that markets are factoring in a 67% probability that the US central bank will reduce interest rates by 50 basis points (bps) this Wednesday. The likelihood of more aggressive policy easing by the regulator could continue to support the gold price.
XAU/USD was falling in the Asian trading session. Today, traders should focus on the US Retail Sales report due at 12:30 p.m. UTC. Recent reports indicated decreasing inflation. Thus, lower-than-expected retail sales data will increase the chance of a 50-bps rate cut, pushing XAU/USD. Conversely, the pair may correct towards $2,560 if retail sales numbers exceed expectations.
Fed Rate Cut Expectations Fuel Euro Surge
The euro (EUR/USD) gained 0.51% against the US dollar (USD) on Monday as the greenback weakened due to rising expectations of a 50-basis-point (bps) rate cut by the Federal Reserve (Fed) later this week.
The US Dollar Index (DXY) has been declining for three consecutive days, pushing up the value of other major currencies, as investors have grown increasingly confident in a supersized rate cut by the Fed. Apart from the weaker-than-expected jobs report on Thursday, there was no major news that may have made investors suddenly feel more optimistic about the dovish Fed. ‘There's only really one story today, and that is a continuation of what we saw last week: after the CPI, the market was comfortable with a 25-bps rate hike, but many people suspect the Fed planted a story to put 50 bps back on the table’, said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.
The European Central Bank (ECB) indicated last week that further rate cuts in the eurozone are not guaranteed and will depend on the data. Thus, the divergence in monetary policy expectations between the ECB and the Fed has expanded even further, supporting the euro. The ECB should ‘almost certainly wait until December’ before cutting interest rates again to be certain it's not making a policy mistake in easing too quickly, ECB Governing Council member Peter Kazimir said on Monday.
EUR/USD was flat during the Asian and early European trading sessions. Today, the main event is the release of the US Retail Sales report at 12:30 p.m. UTC. Higher-than-expected figures may temporarily pause the bullish trend in EUR/USD but are unlikely to reverse it. Conversely, lower-than-expected figures may push the pair higher, probably above 1.11600.
Canadian Dollar Moves Sideways, Awaiting Canadian CPI and Fed Meeting
Yesterday, USD/CAD continued to fluctuate within a relatively narrow range of 1.35650–1.36000 in anticipation of the upcoming interest rate announcement from the Federal Reserve (Fed).
The US Dollar Index (DXY) has decreased due to the rising possibility of a 50-basis-point rate cut by the Fed. The aggressive US rate reduction could lead to a significant decline in the DXY and the USD/CAD exchange rate. According to the CME FedWatch Tool, there is a 67% probability that the Fed will reduce rates by 50 basis points, up from only 30% a week ago.
While a large rate reduction by the Fed is negative for USD/CAD, the Bank of Canada (BOC) can lower its rates to support the economy, pushing the pair higher. ‘A larger move could provide the BOC with the opportunity to consider a substantial rate reduction’, said Michael Goshko, senior market analyst with Convera Canada ULC. Before making a decision on lowering rates, the Canadian central bank will closely monitor inflation reports.
USD/CAD has been trading in a relatively narrow range in Asian and European trading hours. The main event of the week is the Fed interest rate decision on Wednesday. Still, CAD traders should also closely monitor the release of the Canadian Consumer Price Index (CPI) data and US Retail Sales report at 12:30 p.m. UTC. These two economic reports may increase market volatility and cause mixed reactions.