Gold Climbs Higher on Expectations of Rate Cuts by the Fed
Gold (XAU) continued its uptrend and reached 2,390 on Wednesday, gaining 1.18% overall. The rise was supported by a weaker US dollar (USD) and lower Treasury yields following data showing that US consumer prices increased by 0.3% in April, less than the expected 0.4%. The report boosted the chances that the Federal Reserve (Fed) will begin reducing interest rates soon.
The US Dollar Index (DXY) declined by 0.7% on Wednesday, while 10-year US Treasury bond yields reached their lowest level in over a month. According to the US Bureau of Labor Statistics, the US Consumer Price Index (CPI) rose by 0.3% in April, compared to 0.4% in March and February. The core CPI, which excludes volatile food and energy prices, increased by 3.6% annually, aligning with expectations and decreasing from 3.8% in March. Retail sales in the US remained unchanged in April, significantly below the forecast of a 0.4% increase. The data revealed signs of a weakening economy and increased expectations that the US interest rate may be lowered, even though some US data were stronger than expected.
The data suggests that the US inflation rate continued to decline at the beginning of Q2, which may encourage the Fed to cut interest rates in September. According to the CME's FedWatch tool, there is now a 73.2% possibility of a rate reduction in September. The President of the Chicago Federal Reserve Bank, Austan Goolsbee, expressed optimism regarding the continued decline in inflation. He supported the comment of Fed Chair Jerome Powell, who noted that it's unlikely that the central bank will need to raise interest rates further.
XAU/USD was moving sideways during the Asian and early European trading sessions, waiting for the US Jobless Claims report at 12:30 p.m. UTC today. A lower-than-expected number may bring XAU/USD down, while a higher-than-expected figure may push the pair higher. The critical level is 2,400, and a break above could position gold to reach new highs.
"Technically, the gold futures bulls have the firm overall near-term technical advantage. Bulls' next upside price objective is to produce a close in June futures above solid resistance at $2,400.00," Jim Wyckoff, senior analyst at Kitco Metals, wrote in a note.
The Euro Rises on Lower-Than-Expected US CPI Figures
The euro (EUR) rose by 0.59% on Wednesday as the US Consumer Price Index (CPI) report revealed softer-than-expected figures.
US CPI eased to 0.3% month-over-month, below the market forecast of 0.4%. This sparked a broad-market risk rally, fueled by growing optimism for an upcoming rate cut from the Federal Reserve (Fed) in September. According to the CME’s FedWatch Tool, markets are now pricing in a 73.8% chance of at least a 25-basis-point rate reduction at the September meeting. Weaker-than-expected US retail sales figures for April provided additional evidence of an economic slowdown. As a result, the US Dollar Index (DXY) fell towards around 104.2 on Thursday, reaching its lowest level in five weeks.
EUR/USD reached a new monthly high near 1.08900 by the end of Wednesday. Market participants still expect the European Central Bank (ECB) to be one of the first major global central banks to cut rates. The first interest rate decrease is anticipated in June. The Bank of England (BOE) could follow shortly after, but there is no certainty on when the regulator will begin cutting the base rate. Bank of France Governor and ECB Governing Council member François Villeroy de Galhau stated in an interview that 'lower rates should help the economy pick up more in 2025'.
EUR/USD declined slightly in the Asian and early European trading sessions. Today, the euro may face extra volatility when the US Jobless Claims report is released at 12:30 p.m. UTC. The pair might decline if the figures exceed expectations, potentially falling below 1.08600. However, the upward trend in EUR/USD may persist if the Jobless Claims report continues to indicate ongoing weakness in the US labour market.
Canadian Dollar Consolidates Near 1.36000 on Disappointing US Reports
The Canadian dollar (CAD) gained 0.34% on Wednesday as weaker-than-expected US macroeconomic data pushed the US dollar lower.
USD/CAD has been in a downtrend since mid-April. However, the long-term trend remains bullish as the market still expects the Bank of Canada (BOC) to be more dovish in 2024 than the Federal Reserve (Fed). Even though the latest Canadian labour market survey showed a strong rise in employment, investors have only slightly reduced their bets on a rate cut by the BOC in June. Moreover, they still believe there is a near 100% probability of a 25-basis-point (bps) rate cut in July. Some analysts—notably Dylan Smith, vice president and senior economist at Rosenberg Research—believe the regulator should cut rates soon to avoid a technical recession.
Overall, the divergence in interest rate expectations between the Fed and the BOC continues to favour the US dollar, but only marginally. According to interest rate swap market data, investors expect the Canadian central bank to deliver roughly 59 bps worth of rate cuts in 2024, while the Fed is expected to lower the interest rate by 51 bps. Indeed, yesterday's disappointing US retail sales report and slightly lower-than-expected inflation figures fuelled hopes that the Fed would start its easing cycle this year. 'The economic data are picture perfect in favour of interest rate cuts. The country is not out of the woods from the threat of inflation, but we can start to see the end of the forest,' said Christopher Rupkey, chief economist at FWDBONDS.
USD/CAD fell during the Asian trading session but then found support in the 1.36000 area and started to rise during the early European trading hours. Today, traders should focus on the upcoming US Jobless Claims report at 12:30 p.m. UTC. The data could potentially influence the prospects for a Fed rate cut in September and spur some volatility in all USD pairs. According to Reuters, the number of initial jobless claims for unemployment benefits is expected to decline towards 220,000. If the actual number exceeds the forecast, USD/CAD may continue to fall and possibly break below the important 1.36000 level. However, USD/CAD may correct to the upside and head towards 1.36400 if the figures are lower than expected.