Gold Declines on Stronger US Dollar and Hawkish Fed
Gold (XAU/USD) fell for the second consecutive day on Monday, pressured by a strengthening US dollar (USD) and a less optimistic Fed monetary policy outlook.
Recently, investors have tempered their expectations for the extent of future US rate cuts: stronger-than-expected jobs and consumer inflation reports were offset by rising weekly jobless claims and slowing producer inflation. These mixed signals have been a driving force behind the recent increase in US Treasury bond yields. As a result, the US dollar remains well-supported at nearly a two-month high, creating headwinds for the non-yielding gold. Also, the market readjusted its rate cut expectations and prices in an 88% probability of a 25-basis-point (bps) reduction by the Fed in November.
Geopolitical risks arising from the ongoing conflicts in the Middle East could support the safe-haven asset and help prevent significant losses, advising caution for aggressive bearish traders. Additionally, reports suggest that China recently carried out large-scale military drills near Taiwan, deploying a record number of aircraft and, for the first time, involving its coast guard to encircle the island. These global tensions may drive the gold price further, limiting further downside amid the strengthening US dollar and rising bond yields.
XAU/USD was falling during the Asian trading hours. Today, traders should focus on the release of the US Empire State Manufacturing Index report at 12:30 p.m. UTC. Higher-than-expected figures may pull XAU/USD lower, below $2,635. However, the medium-term bullish trend in XAU/USD may continue if the figures are lower than the forecast.
Euro Weakens Further as the Bullish Trend in the US Dollar Index Continues
The euro (EUR/USD) lost 0.26% against the US dollar (USD) on Monday as the bullish trend in the US Dollar Index (DXY) persisted, pushing the greenback towards a 10-week high.
Trading volume was rather low yesterday as Japanese, Canadian, and US banks were closed due to national holidays. Expectations for smaller interest rate cuts by the Federal Reserve (Fed) have supported the dollar in the last few weeks, but that adjustment is unlikely to last very long. 'I suspect that rate adjustment is almost over, and we're back on the downtrend. But I do think there is still one more gasp. We might trigger stops at $1.09 in the euro or $1.30 in sterling. But I am looking ahead, and the next US jobs data is about 120,000. It's going to be a weak number', said Marc Chandler, chief market strategist at Bannockburn Global Forex. According to the London Stock Exchange Group, the US rate futures market has priced in an 87% chance of 25-basis-points (bps) cut at the November Fed meeting and a 13% chance of the interest rates staying unchanged within the target range between 4.75% and 5%.
Meanwhile, the European Central Bank (ECB) is expected to lower rates this week. Analysts have highlighted that a divergence between the eurozone and the US government bond markets is expected to widen further as the weak European economy adds to the pressure on the ECB to cut interest rates quickly.
EUR/USD was falling during the Asian and early European trading sessions. Today, German ZEW Economic Sentiment and eurozone Industrial Production data will be published at 9:00 a.m. UTC, revealing the state of the economy. Lower-than-expected figures will extend the bearish trend in EUR/USD below 1.08700. Conversely, higher-than-expected results may temporarily pause the bearish trend but are unlikely to reverse it.
Australian Dollar Seems Ready to Drop
The Australian dollar (AUD/USD) continued to decline on Monday and lost 0.36% due to sentiment still being weighed down by a lack of stimulus measures from China after weak data.
A report by Caixin suggested that China might increase its fiscal stimulus by an additional 6 trillion yuan ($850 billion) over the next three years and provided support for the Australian dollar. The report sparked a rebound in the Australian dollar, New Zealand dollar, and Chinese yuan, noted Commonwealth Bank of Australia's economist Kristina Clifton. She emphasised that these currencies will remain sensitive to further news regarding China's anticipated fiscal stimulus measures. Clifton anticipates that more details will be announced at the National People's Congress meeting later this month, providing additional clarity on the potential impact of the proposed stimulus package on the currencies.
In the broader foreign exchange market, the US dollar is getting some support due to expectations that the US Federal Reserve (Fed) may choose to reduce interest rates by only 25 basis points (bps) in November. Two Federal Open Market Committee members supported a moderate monetary policy easing. In contrast, the Reserve Bank of Australia (RBA) is expected to reduce its cash rate only in February next year, with only 40% of analysts pricing in a rate cut in December, according to RBAWATCH—a source that tracks market expectations regarding the RBA's monetary policy decisions.
AUD/USD has been declining during Asian and early European trading hours. Today, traders should focus on the release of the US Empire State Manufacturing Index at 12:30 p.m. UTC. Higher-than-expected figures may push AUD/USD below 0.67000, while softer data may support the Australian dollar.