Gold Strengthens on USD's Pullback
Gold (XAU) rose by 0.59% on Monday as the US dollar (USD) retreated from an eight-week high.
Investors are eagerly awaiting this week's economic reports for insight into the Federal Reserve's (Fed) plans for interest rate cuts this year. The US core Personal Consumption Expenditures (PCE) price index report, consumer spending and income data, the third estimate for Q1 Gross Domestic Product growth, and the goods trade balance are key reports to watch this week. On Monday, San Francisco Fed President Mary Daly stated that she believes the US central bank shouldn't lower rates until there is confidence that inflation is moving towards 2%. Investors also look forward to speeches from other Fed officials scheduled throughout the week, including Fed Governors Lisa Cook and Michelle Bowman.
According to the CME FedWatch Tool, the market now sees a 67.7% probability of a rate cut in September, up from 59.5% previously. Overall, investors' risk appetite has moderated, leading them to seek safety in gold. US Treasury bond yields remain flat, with the 10-year Treasury note staying at 4.253%. The US Dollar Index (DXY), which measures the dollar's value against a basket of six other currencies, declined by 0.33% towards 105.500. Safe-haven flows triggered by continuing geopolitical tensions in the Middle East and Ukraine could further bolster the gold price in the near term.
XAU/USD fell during the Asian trading session. Today, the US Consumer Confidence report will be released at 2:00 p.m. UTC and might affect the pair. Higher-than-expected numbers will likely exert bearish pressure on XAU/USD. However, the US dollar may weaken and push gold higher if consumers are pessimistic.
"Spot gold is poised to break support at $2,319 per ounce and fall towards $2,302", said Reuters analyst Wang Tao.
The Euro Rises, but the Fundamental Pressure Remains Bearish
The euro (EUR) gained 0.38% on Monday as the US Dollar Index (DXY) dipped from an eight-week high due to a strong technical resistance.
Traders' speculation that the Japanese government may soon intervene in the Forex market and sell the US dollar (USD) to support the yen has also contributed to the sell-off in the DXY. Therefore, the euro strengthened against the US dollar despite yesterday's German Ifo Business Climate Index being lower than expected. Fundamentally, however, a surprising drop in German business confidence supports investors' expectations for interest rate cuts by the European Central Bank (ECB) and exerts downward pressure on EUR/USD. In addition, the euro remains under pressure due to political uncertainty as the upcoming French elections may produce an unfavourable outcome. Specifically, a victory by far-right parties could lead the French government to increase public spending and provoke a budgetary crisis in Europe.
Traders are now pricing in almost 50 basis points (bps) worth of rate cuts over the next six months. The latest interest rate swap market data shows an 83% probability of a rate cut by the ECB and a 74% chance of a rate reduction by the Federal Reserve (Fed) in September. In other words, traders continue to expect the ECB to be more dovish than the Fed, which, in theory, should support the US dollar against the euro.
EUR/USD was rising slightly during the Asian and early European trading sessions. Today, the main event for the pair is the publication of the US Conference Board Consumer Confidence Index at 2:00 p.m. UTC. The data will show how consumers view their current financial conditions. The report may shed light on future consumer spending and give clues about potential changes in inflation and the US interest rate path. Higher-than-expected figures will likely push EUR/USD down, possibly below the critical 1.07000 level. Conversely, lower-than-expected numbers may provoke a rally towards 1.07800.
Canadian Dollar Drops to a Three-Week Low Ahead of Canadian CPI Report
The Canadian dollar (CAD) gained 0.29% on Monday as the US Dollar Index (DXY) declined from an eight-week high due to strong technical resistance and growing speculations that the Bank of Japan may soon intervene in the Forex market to support the yen.
USD/CAD has been falling almost uninterruptedly since 11 June, even as the US Federal Reserve (Fed) officials communicated a more cautious approach to future rate cuts. Still, traders expect the Bank of Canada (BOC) to be more dovish than the Fed this year. Indeed, BOC Governor Tiff Macklem said there was enough slack in the Canadian labour market to allow for growth and the creation of more jobs, even as the inflation rate continues to decline.
"Governor Macklem believes that a soft landing is still in the cards", said Tiago Figueiredo, macro strategist at Desjardins.
However, the fundamental pressure on USD/CAD remains bullish. 'We are seeing a little bit of position squaring. Traders are very long of US dollar', said Michael Goshko, senior market analyst at Convera Canada.
USD/CAD was rising slightly during the Asian and early European trading sessions. Today, traders should prepare for extra volatility as the Canadian Consumer Price Index (CPI) report at 12:30 p.m. UTC and US Consumer Confidence data at 2:00 p.m. UTC may significantly impact the USD/CAD exchange rate. Arguably, CPI data is more important. If the numbers are higher than expected, USD/CAD may continue to fall and possibly break below the important 1.36000 level. However, lower-than-expected inflation figures may push USD/CAD upwards, and the pair might attempt to test the resistance near 1.36800.