Gold (XAU/USD) declined by 0.89% yesterday as the Federal Reserve (Fed) Chair Jerome Powell gave hawkish comments at the National Association for Business Economics.
Powell stated that the recent 0.5% rate cut shouldn't be viewed as a signal for equally aggressive moves in the future and that any additional reductions will depend on economic data. He also emphasised that the US economy remains strong, and he expects a soft landing. Gold is heading for its largest quarterly gain since early 2016, fuelled by the Fed's 50-basis-point (bps) cut in September, heightened tensions in the Middle East, and China's additional monetary stimulus.
The probability of another 50-bps rate cut in November has dropped to 38%, down from over 50% last week. Thus, gold has been falling for the second day amid month-end flows favouring the US dollar (USD) despite declining US Treasury yields. XAU/USD dropped towards $2,635 but still closed September with a 5.4% gain—its best month since March.
The US Dollar Index (DXY) edged up 0.34% towards 100.8, weighing on gold. Geopolitical tensions remain high after Israel's strike on Hezbollah's headquarters in Lebanon, but analysts note that gold has struggled to find bullish momentum.
XAU/USD was increasing during Asian trading hours as Lebanese troops pulled back from the Israeli border late Monday amid rising tensions after Israel killed Hezbollah's leader, signalling a possible ground invasion. Today, investors should focus on the US ISM Manufacturing Purchasing Managers' Index (PMI) report due at 2:00 p.m. UTC. A higher-than-expected number will put downward pressure on XAU/USD, while lower-than-anticipated figures might suggest a bullish outlook for the pair.
"Spot gold may rise towards a range of $2,654 to $2,667 per ounce, following its stabilisation around $2,626", said Reuters analyst Wang Tao.
The Euro Corrects Downwards After Powell's Speech
The euro (EUR/USD) lost 0.26% against the US dollar (USD) on Monday after Federal Reserve (Fed) Chair Jerome Powell's relatively hawkish speech. Powell's comments made investors less confident that the US central bank would lower interest rates by 50 basis points (bps) again at its next meeting.
Powell stated that recent updates to data on economic growth, savings rates, and personal income had removed some ‘downside risks’ the Fed has been focused on. He indicated that he anticipates two more interest rate reductions, totalling 50 bps, this year as a baseline 'if the economy performs as expected‘. Powell also warned that it might take several years for housing services inflation to decrease to a desirable level. Overall, the market treated his remarks as hawkish: the probability of a 50-bps rate cut in November dropped below 40%, down from 53% a day before, pushing the |US Dollar Index (DXY) higher.
Meanwhile, preliminary data from the German Federal Statistics Office showed that the country's inflation in September eased to 1.8%, slightly more than the forecast. The data raised the chances of a rate cut by the European Central Bank (ECB) at the monetary policy meeting on 17 October. Overall, EUR/USD has been struggling to close above 1.11920 for more than a month now, so bears may be finally taking the upper hand.
EUR/USD was mostly flat during the Asian and early European trading sessions. Today's main events are the eurozone Consumer Price Index (CPI) report at 09:00 a.m. UTC, the US ISM Manufacturing Index, and the JOLTS Job Openings, both at 2:00 p.m. UTC. If eurozone inflation slows faster than expected, EUR/USD may face more bearish pressure and will likely drop below 1.11000. However, only strong US data can trigger the start of a new bearish trend in EUR/USD. The pair may rebound above 1.11700 on weaker-than-expected US reports.
British Pound Trades Sideways Ahead of Crucial Reports
GBP/USD moved near the upper part of the 1.33500–1.34300 range throughout most of Monday but decreased to its lower part after Jerome Powell pushed back against bets on more supstantial interest rate cuts.
The Federal Reserve (Fed) Chair Powell adopted a more aggressive stance in his speech, suggesting that the US central bank is likely to maintain its current trajectory of 0.25% reductions in interest rates.
"This is not a committee that is eager to swiftly reduce rates", he stated.
Market participants anticipate that the Fed will continue to lower rates at their next policy meeting scheduled for November. However, expectations for a 50-basis-point (bps) decrease dropped towards 38.2%, down from 53.3%, according to the CME FedWatch Tool.
Matt Simpson, a senior market analyst at City Index, stated that while a 50-bps decrease cannot be ruled out entirely, it's contingent on the state of economic data. If economic indicators deteriorate, such a move may be justified. However, Powell strongly believes that market sentiment regarding future rate reductions is overly optimistic. Last month, the Fed initiated its easing cycle by implementing a larger-than-expected 50-bps reduction. Powell's address took place in the context of a particularly eventful week for US economic data. The Institute for Supply Management's Manufacturing Index will come out on Tuesday, the non-manufacturing report will be released on Thursday, and the crucial Nonfarm Payroll (NFP) report will be published on Friday. If the non-manufacturing and NFP data surpass expectations, as Simpson suggested, the US dollar may experience a ‘slight uptick’ before ultimately resuming its downward trend.
GBP/USD has been moving sideways during Asian and early European trading hours today. The market will be waiting for the US ISM Manufacturing Purchasing Managers' Index data today at 2:00 p.m. UTC. Higher-than-expected numbers may trigger a downward correction in GBP/USD towards 1.33000. Conversely, weaker data may provide some support for the pair.