Gold Faces Challenges as the US Dollar Strengthens
Gold (XAU/USD) dropped by 0.79% as the US dollar (USD) and Treasury yields increased after Federal Reserve (Fed) Chair Jerome Powell's dovish remarks.
Demand from China supports the gold price, but a stronger US dollar and rising yields put downward pressure on XAU/USD. On Wednesday, the gold price dropped by more than 0.7% as the US dollar rebounded following Powell's indication that the central bank is prepared to ease policy due to concerns about a weakening labour market.
Still, gold remained above $2,500, even as the US 10-year Treasury yields increased by two basis points to 3.841%, pressuring the non-yielding metal.
"‘We’re seeing a little pressure coming from a bit firmer dollar. And at this point, we’re waiting for further information to drive this market either one direction or the other based on that inflationary data," Reuters sources noted.
According to John Reade, chief market strategist at the World Gold Council, the demand for gold is expected to remain strong, particularly in emerging markets like China, India, and Turkey. Ole Hansen, head of commodities strategy at Saxo Bank A/S, marked:
"US data has failed to give gold any further lift, so the temptation for traders to book some profit after a long run has been rising."
The rate futures markets have fully priced in a 25-basis-point (bps) rate cut in September, with a 34.5% likelihood of a more substantial cut, according to the CME FedWatch Tool. Overall, traders anticipate a total of 100 bps of easing by the Fed this year.
XAU/USD rose during the Asian and early European trading sessions. Today, the main event is the US Gross Domestic Product (GDP) Growth Rate report, due at 12:30 p.m. UTC.
The US GDP numbers for Q2 are expected to grow by 2.8%. If the figures are lower than expected, XAU/USD may continue to rise towards $2,530. However, higher-than-expected figures can trigger XAU/USD's correction towards $2,500 again.
"Spot gold may break resistance at $2,515 per ounce and rise towards $2,528", said Reuters analyst Wang Tao.
Euro Shows First Signs of Weakness
Yesterday, the EUR/USD went into a downward correction and retested the 1.11000 level, losing 0.58%. Meanwhile, the US Dollar Index (DXY) rebounded from the key support level of 100.600 and gained 0.48%.
Germany will release preliminary inflation data for August at 12:00 p.m. UTC today. Senior European Central Bank (ECB) officials will also participate in a panel discussion.
Headline inflation is expected to decrease towards 2.3% in August, likely leading to a further decrease in the eurozone inflation rate, as indicated by the forthcoming inflation report due Friday.
The ECB is projected to continue easing monetary policy for the rest of the year, with market participants pricing in a potential decrease in interest rates in September. However, there is uncertainty regarding the possibility of further interest rate reductions in October and December.
According to market expectations, the ECB may implement approximately 60 basis points of rate cuts by the end of the year.
Also, the Personal Consumption Expenditures (PCE) Price Index report, the Federal Reserve's (Fed) preferred measure of inflation, will be released on Friday. The data could help determine the extent of the current recovery in the US dollar's (USD) value.
However, the nonfarm employment report next week is likely to have a greater impact, given Fed Chair Jerome Powell's recent emphasis on the labour market.
The US jobless claims data will be released today at 12:30 p.m. UTC and may cause increased volatility. The data is important to monitor as Fed policymakers stated they wouldn't like to see a further deterioration in the labour market.
EUR/USD has been slightly rising during Asian and early European trading sessions. The pair is getting settled before the German inflation report and US Jobless Claims data.
The number of unemployment benefit requests in the US is expected to remain stable at 232,000. Higher numbers may support EUR/USD, while low figures will put bearish pressure on the pair.
Japanese Yen: Bearish Trend Continues, but Short-Term Rebound Is Possible
On Wednesday, the Japanese yen (USD/JPY) lost 0.43% against the US dollar (USD) as traders exited their short positions in the greenback due to seasonal and technical factors.
Fundamentally, USD/JPY is in a clear bearish trend, as the market is almost certain that the Federal Reserve (Fed) will reduce its interest rates in the months ahead. At the same time, investors expect the Bank of Japan (BOJ) to hold the rates unchanged for the rest of the year before start increasing them in January 2025.
However, the US Dollar Index (DXY) may have reached a temporary bottom as the two-month bearish trend has exhausted. This could lead to a potential stabilization and an upward movement in USD/JPY.
USD/JPY was rising slightly during the Asian and early European trading session. The next two days could be very volatile for the pair as macroeconomic data will be coming out, potentially impacting investors' interest rate expectations.
Today, the US will release its second estimate for the Gross Domestic Product (GDP) Growth Rate in Q2 and the weekly Jobless Claims report, both at 12:30 p.m. UTC.
Also, Pending Home Sales data will be published at 2:00 p.m. UTC. These three reports may trigger short-term volatility, but they are unlikely to change the bigger picture unless they greatly miss expectations.
The key reports that may move the markets are the Tokyo Consumer Price Index (CPI), due at 11:30 p.m. UTC later today, and the US Personal Consumption Expenditure (PCE) Price Index tomorrow at 12:30 p.m. UTC.
Inflation is a key indicator that determines countries' monetary policy. If Tokyo CPI numbers are higher than expected, while the US PCE continues to decline, the bearish trend in USD/JPY will almost certainly resume, with traders targeting 142.500.