Gold Hovers Near Record Highs After Dovish Powell's Comments
Gold (XAU/USD) traded close to record levels after Federal Reserve (Fed) Chair Jerome Powell's dovish comments at the Jackson Hole symposium.
In his Jackson Hole speech last Friday, Powell suggested that the Fed is ready to adjust its monetary policy, with the timing and scale of rate cuts depending on upcoming economic data. He also highlighted that risks in the job market have increased while inflation risks have diminished.
The regulator now feels more assured that inflation is nearing its 2% target, bolstering the case for lowering the base rate. Markets are currently divided on whether the Fed will opt for a 25 or a 50-basis-point (bps) cut at its September meeting.
Overall, investors anticipate a total of 100 bps rate cuts until the end of the year, which would reduce the opportunity cost of holding non-yielding assets such as gold.
Additionally, rising geopolitical tensions in the Middle East and ongoing economic uncertainty are expected to increase safe-haven demand, which could support gold prices. However, the weak demand in China's economy, the world's largest gold producer and consumer, may offset these gains and put downward pressure on the metal.
XAU/USD fell during the Asian and early European trading sessions. Today, traders should focus on the release of the US Durable Goods Orders report at 12:30 p.m. UTC. Lower-than-expected figures should positively impact XAU/USD, potentially pushing the price back above $2,520.
However, the bearish trend in the pair may continue if the figures are better than expected.
"Spot gold may rise to $2,559 per ounce, as it has completed a pullback towards a triangle", said Reuters analyst Wang Tao.
Euro Renews Maximums on Powell's Speech
EUR/USD gained 0.73% on Friday, finishing the day just below the 1.12000 resistance level. The most bullish momentum the pair got right after Jerome Powell's Speech at Jackson Hole.
At his keynote address to the annual economic conference of the Kansas City Federal Reserve (Fed) in Jackson Hole, Powell stated that it was time for policy adjustments, given that inflation risks had decreased and employment risks had increased.
He emphasised that the Fed didn't seek further cooling of labour market conditions and would do everything possible to support a robust labour market while working towards price stability.
Following Powell's remarks, traders continued to price in a 65% chance of a 25-basis-points (bps) rate reduction at the 17–18 September meeting. However, they also priced in a 30% chance of a larger 50-bps reduction, up from slightly more than 25% earlier.
"I think the markets' reaction, which has been the dollar a bit weaker, bond yields a bit lower, is about right. It's not like he said, 'Yeah, we're going to do three [cuts of] 50 bps to begin the easing cycle", said Steve Englander, head of G10 Foreign Exchange Research at Standard Chartered Bank.
"Implicitly, it opens the door to 50 bps at some point without giving a timetable for it. We still don't think 50 [basis points] is going to be the first move, but it could come quickly if the labour market continues to weaken", he said in response to Powell's comments on inflation and employment.
A move in September would shift the Fed away from its restrictive interest rate policy, which has been in place since March 2022. In these two years, the federal fund's target range rose from approximately zero to 5.25% to 5.5%, which has remained unchanged since July 2023.
The pair has been moving in a range during the Asian and early European sessions. Data from the US Durable Goods Orders report may influence the euro today at 12:30 p.m. UTC.
A reading higher than expected could exert downward pressure on EUR/USD, while lower data could provide bullish momentum for the pair and push it towards the 1.2500 resistance level.
Powell's Rate Cut Signal Lifts the British Pound to a 17-Month High
The British pound (GBP/USD) surged by 0.92% and closed at a 17-month high against the US dollar (USD) on Friday. The greenback and US Treasury yields dropped sharply after Jerome Powell, the Federal Reserve (Fed) Chair, essentially confirmed that the US central bank would cut interest rates in September.
Specifically, Powell said that ‘the time has come for policy to adjust’, arguing that inflation was nearing the Fed's 2% target. The market has been expecting a September rate cut since the end of July and has essentially priced it in by pushing the US Dollar Index (DXY) to an eight-month low. Still, Powell's comments managed to produce an additional bearish impact on the US dollar and Treasury yields.
"FX is a relative game, so the expectation for the Fed to join the other major banks soon in cutting rates is driving the dollar lower", said Uto Shinohara, managing director and senior investment strategist at Mesirow in Chicago.
The market probably hopes that a 50-basis-point rate cut may be delivered at some point, especially if the US labour market continues to weaken.
Meanwhile, the bullish move in GBP/USD was additionally supported by positive signals in the U.K. economy. According to the GfK survey released on Friday, British consumer confidence remained at an almost three-year high in August, while enthusiasm for major purchases rose to its highest level since January 2022.
Currently, traders don't expect the Bank of England (BOE) to ease its monetary policy in September. Instead, they price in a near 100% probability of a 25-bps rate cut in November.
GBP/USD was declining slightly during the Asian and early European trading sessions. Today, the volatility in all GBP pairs will likely be lower than usual as all U.K. exchanges and banks will be closed due to the Summer Bank Holiday.
Still, the release of the US Durable Good Orders report at 12:30 p.m. UTC may produce some noticeable moves in GBP/USD. If figures are stronger than expected, the pair may correct downwards, but probably not below 1.31800. Conversely, lower-than-expected results will keep GBP/USD near its recent highs, but a further rise is unlikely.