Gold Remains Near Record Highs Amid Dovish Fed and Lower Payroll Numbers
Gold (XAU) remained near record highs on Thursday as markets continued digesting the Federal Reserve's (Fed) dovish stance revealed in the FOMC minutes.
Nonfarm payrolls in the US were revised downward by nearly 820,000 for the year ending March 2024, based on The Quarterly Census of Employment and Wages estimates.
This revision has heightened concerns that the US labor market is significantly affected by high rates, especially after July's weaker-than-expected payroll figures. This bolstered the argument for the Fed to implement aggressive rate cuts this year.
Additionally, the July FOMC meeting minutes indicated several officials inclined toward an immediate rate cut. These factors, combined with ongoing geopolitical risks, should support gold.
The markets are now pricing in a 34% chance of a 50-basis-point (bps) rate cut next month, up from 29% the previous day. Overall, 100 bps of total easing by the Fed is expected by the end of this year, which supports the non-yielding precious metal.
Meanwhile, the absence of a truce agreement between Israel and Hamas keeps the risk of a broader Middle East conflict alive, potentially providing additional support for XAU/USD.
XAU/USD dropped by 0.35% in the Asian trading session. Today, S&P Global will release its latest Purchasing Managers' Indices (PMI) for several major economies. The eurozone PMI is at 8:00 a.m., the U.K. PMI is at 8:30 a.m. UTC, and the US PMI is at 1:45 p.m. UTC.
All reports will probably affect the price of gold, but the US report may have the strongest impact. If the US PMI figures show an increase in economic activity and exceed the forecast, XAU/USD may possibly drop below $2,490. Conversely, weaker-than-expected numbers may prolong the bullish trend in gold.
"Spot gold may drop into a range of $2,479 to $2,487 per ounce, following its failure to break resistance at $2,520", said Reuters analyst Wang Tao.
Euro Reached a New High This Year
EUR/USD traded bullish on Wednesday. First, the pair retested the 1.11000 support level, and after the FOMC minutes rose towards 1.11500, gaining 0.19% in a day.
The US Dollar Index (DXY) touched the 101.000 support level and finished the day at its lowest mark since 28 December 2023, as the minutes showed policymakers were ready to start cutting US interest rates.
The minutes stated that the ‘overwhelming majority’ said that if data were to come in as expected, a reduction in September would likely be appropriate. In response, the US stock prices rose, bond prices rallied, and the US dollar (USD) value decreased.
"The clear message from the minutes of the [Federal Reserve] meeting has been the driving force behind the recent decline in the value of the US dollar", stated Ray Attrill, head of currency strategy at National Australia Bank.
Traders are now pricing in a 35.5% likelihood of a 50-basis-point (bp) reduction at the Federal Reserve's September meeting, up from 33% the day before. A possibility of a 25-bps reduction stands at 65.5%, according to CME Group's FedWatch Tool.
On Friday, Powell will deliver the keynote address in Jackson Hole, and markets expect any clues about the likely size of the cut next month and the overall monetary policy path.
‘We favor a 25-bp cut because the US economy is still performing well—50-bps reductions are typically reserved for situations when the economic outlook is threatened’, said Kristina Clifton, senior economist and currency strategist at Commonwealth Bank of Australia.
The euro saw a minor correction at the start of today's trading session as it cooled off after yesterday's rally. The US Jobless Claims and preliminary manufacturing and services Purchasing Manager's Indices (PMI) reports will be released today at 12:30 p.m. and 1:45 p.m. UTC, respectively.
If the Jobless Claims figures exceed expectations, they could be bullish for the euro, while weaker-than-expected data could exert downward pressure on EUR/USD.
Similarly, lower-than-anticipated US PMI data may support the currency, while stronger readings will likely reinforce today's correction and push the euro down towards the 1.11000 level.
Japanese Yen Is on a Downtrend as BOJ's Hawkish Stance Supports Japanese Yen
The Japanese yen (JPY) traded within a broad 144.500–147.000 range against the US dollar (USD) on Wednesday but finished the day essentially unchanged.
The US Dollar Index (DXY) dropped to an 8-month low yesterday after the US Bureau of Labor Statistics (BLS) revealed that employers added 818,000 fewer jobs over the April 2023 – March 2024 than previously reported.
The weaker-than-expected job growth data announcement comes just ahead of a highly anticipated speech by Federal Reserve (Fed) Chair Jerome Powell at the Jackson Hole economic symposium in Kansas City on Friday.
Investors and policymakers will closely watch this speech for any new insights into Powell's perspective on the current state of the labor market and his guidance for future monetary policy.
Currently, the market expects the Fed to pursue a rather dovish monetary policy over the next 12 months. Interest rate swaps market data implies more than 200 basis points (bps) worth of rate cuts by the Fed by the end of 2025.
Conversely, the Bank of Japan (BOJ) is expected to follow a different path. Investors currently price in just under 30 bps worth of rate hikes by the BOJ by the end of 2025.
Unsurprisingly, USD/JPY has been on a downtrend lately as the interest rate differential between the US and Japan is expected to narrow sharply, providing less support for the greenback.
USD/JPY was falling slightly during the Asian and early European trading sessions. Today, the main focus will be on S&P Global's Purchasing Managers Indices (PMI).
Specifically, USD/JPY traders should monitor the release of the US composite PMI due at 1:45 p.m. UTC.
Higher-than-expected figures may lead to a sharp upward correction in USD/JPY. Meanwhile, lower-than-expected results will prolong the bearish trend, and the pair may start moving towards the 144.000 support area.