Gold Rose by Over 1% on Soft US Economic Data
Yesterday, XAU/USD broke above the resistance level of 2,340 and gained 1.14% as news and US reports bolstered investor hopes for an imminent interest rate cut by the Federal Reserve (Fed).
US economic data released on Wednesday, particularly the weak ADP report on services and employment, showed a slowdown. Additionally, a report on initial jobless claims for the last week showed an increase, supporting the view that the labor market is gradually cooling. The number of people applying for unemployment benefits rose further to a 2-year high by the end of June.
The ISM Services Purchase Manager's Index (PMI) data released yesterday was softer than expected, further fueling investors' hopes for rate cuts by the US central bank. The main focus is now on tomorrow's Nonfarm Payroll (NFP) report. The lower-than-expected NFP data could prompt the Fed to start lowering rates.
After the release of the latest economic data, markets are now pricing in a 74% chance of the Fed cutting interest rates in September, according to the CME FedWatch Tool. ‘The level of interest rates that's neutral in its impact on the economy likely hasn't risen much’, said New York Fed President John Williams.
According to Reuters, "Fed officials at their last meeting acknowledged that the US economy appeared to be slowing but still counseled a wait-and-see approach before committing to rate cuts, according to minutes from the June 11–12 session".
Today, a quiet and calm market is expected ahead of tomorrow's increased volatility during the release of NFP data at 12:30 p.m. UTC. Today is Independence Day in the US, and the market will be closed. Thus, strong movements are not expected during the holiday. XAU/USD may slightly correct downwards after yesterday's growth towards around 2,350.
Euro Jumps Higher on Rising Hopes for US Rate Cuts
The euro (EUR) gained 0.39% on Wednesday after US macroeconomic reports were weaker than expected, increasing the probability of the Federal Reserve (Fed) delivering two rate cuts this year.
Yesterday, US ADP Employment, Jobless Claims, and ISM Services Purchasing Managers' Index (PMI) reports revealed that the US economy was slowing. Specifically, the employment report showed that only 150,000 new jobs were created in June instead of the expected 160,000. The data suggests that the closely-watched Nonfarm Payroll (NFP) report due this Friday may also indicate emerging weakness in the labor market. Furthermore, ISM Services PMI dropped to a four-year low, hinting at the US economy slowing at the end of Q2.
"All of this creates mood music that is conducive to a modest easing in the degree of restraint in monetary policy later in the year, and we still expect two quarter-point cuts in September and December", said Conrad DeQuadros, senior economic advisor at Brean Capital.
Indeed, the latest interest rate swap market data implies roughly 48 basis points worth of cuts by the Fed in 2024. Meanwhile, according to official messages, the European Central Bank's (ECB) monetary policy may not be as dovish as previously expected. On Wednesday, Slovenian central bank chief Bostjan Vasle urged the ECB to wait before lowering interest rates again, highlighting potential risks that could disrupt the eurozone's disinflationary trend.
EUR/USD was falling slightly during the Asian and early European trading sessions. The US financial market will be closed today due to Independence Day, so the American trading session will likely be quiet. However, volatility may increase during the late European session, as traders will be repositioning before Friday. The technical bias in EUR/USD remains bullish as the pair moves above the important intraday level of 1.07700.
The US Dollar Slides on Soft Data, Boosting the Canadian Dollar
The Canadian dollar (CAD) gained 0.28% on Wednesday after softer-than-expected US economic data increased the chances of rate cuts by the Federal Reserve (Fed) this year.
USD/CAD hit a one-month low yesterday as weaker-than-expected US statistics surprised investors. All three reports—ADP Employment, Jobless Claims, and ISM Services Purchasing Managers' Index (PMI)—indicated that the economy was slowing at an accelerating rate, meaning that the Fed is now more likely to deliver a 25-basis-point rate cut this autumn. Indeed, according to the CME FedWatch Tool, investors have a 74% probability that the regulator will ease its monetary policy on September 18.
"The economic data surprises in the US are now undershooting expectations relative to other major economies, which has generally coincided with periods of dollar weakness", wrote Jonas Goltermann, deputy chief markets economist at Capital Economics.
At the same time, the Canadian dollar received an additional boost from rising oil prices after a larger-than-expected decline in US crude stocks offset traders' concerns about rising global inventories. Crude oil is one of Canada's key export items, so its price negatively correlates with USD/CAD. Still, the latest strength in the Canadian dollar was mostly caused by the greenback's weakness.
"It is more of a US story than a Canadian one", said Tony Valente, senior FX dealer at AscendantFX.
In the long term, the market expects the Canadian dollar to strengthen. According to the latest Reuters poll, investors believe that CAD will likely rise over the coming year as the US election creates a lot of uncertainty.
USD/CAD was essentially unchanged during the Asian and early European trading sessions. The US financial market will be closed today due to Independence Day, so the American trading session will likely be quiet. However, volatility may increase during the late European session as traders will reposition ahead of Friday, featuring two important news releases. Apart from the headline US Nonfarm Payroll report, CAD traders should also monitor the Canadian Employment report. The data may significantly impact the Bank of Canada's monetary policy outlook.