Today's CPI Report Will Define Gold's Movement
The gold (XAU) price has been rising for two consecutive days, and XAU/USD gained 0.33% yesterday. Many investors expect US inflation data to define the pair's further trend.
Traders believe today's Consumer Price Index (CPI) report for June will favor gold and strengthen investors' optimism about lowering interest rates. The annual CPI inflation is expected to ease from 3.3% in May to 3.1% in June, while the core CPI is expected to remain at 3.4%.
Investors believe that any unexpected decline in the consumer price index can weaken the US dollar (USD), pushing XAU/USD upward towards the resistance level of $2,400. Federal Reserve (Fed) Governor Lisa Cook said on Wednesday that US inflation should continue declining without a significant rise in the unemployment rate.
As reported by Reuters:
"Fed Chair Jerome Powell said on Wednesday that the US central bank would make interest rate decisions "when and as" they were needed. On Tuesday, he told House members that "more good data" would build the case for a rate cut".
According to the CME FedWatch Tool, traders expect a rate cut in September with a 73% probability and a second rate reduction in December with a 46% chance.
The US CPI report will be released today at 12:30 p.m. UTC. If the data shows a decline in inflation, the chances of the Fed's rate cut will increase, possibly pushing XAU/USD up towards $2,400.
If the CPI figures are higher than expected, it will be a bearish surprise for gold, as the US dollar will strengthen. Thus, gold may decline towards the support level of $2,375 and break below it.
Euro Traders Await Today's US Inflation Data
On Wednesday, EUR/USD rose by 0.15% and reached the 1.08400 resistance level after Federal Reserve (Fed) Chair Jerome Powell's testimony and ahead of today's US inflation reports.
Jerome Powell stated yesterday that the central bank would make interest rate decisions ‘when and as’ they become necessary. He rejected speculation that a possible September rate reduction could be viewed as a political move ahead of the upcoming presidential election. Important US inflation data will be released later today.
According to economists surveyed by Reuters, the annual rate of change in the consumer price index (CPI) is expected to slow towards 3.1% in June. The core CPI, which excludes food and energy prices, is anticipated to remain steady at 0.2% month-on-month.
Based on Fed funds futures data from the CME Group (NASDAQ:CME), there is a 73.3% probability that the US central bank will ease monetary policy at its September meeting. However, the market's uncertainty about inflation has increased this year, and a sudden increase in CPI could further impact asset prices and the outlook for the euro.
The euro has been trading sideways today during Asian and early European trading sessions, just below the 1.08400 resistance level. The US CPI data comes out today at 12:30 p.m. UTC. A higher-than-expected figure may exert a bearish pressure on EUR/USD, while a lower-than-expected number may give the pair a bullish impulse.
Dovish Fed and Strong UK GDP Data Fuel Pound Rally
The British pound (GBP) gained 0.49% against the US Dollar and closed at a three-month high on Wednesday. The greenback weakened after Jerome Powell, the Federal Reserve (Fed) chairman, suggested that the US central bank was not far away from cutting interest rates.
During the second day of his testimony before the Senate Banking Committee, Jerome Powell indicated that he wanted to see a deeper decline in inflation. Yet he also stressed that the labor market was cooling and a lower base rate may be appropriate soon.
"Powell took a relatively cautious approach. But there were enough dovish hints within his narrative to help risk appetite improve in markets", said Karl Schamotta, chief market strategist at Corpay in Toronto.
Indeed, the market now prices more than 50 basis points (bps) worth of rate cuts by the Fed before the end of the year. These anticipations exert downward pressure on the US dollar Index (DXY) and pull other major currencies, including the British pound, higher.
Fundamentally, there is now a minor divergence in monetary policy expectations because the Bank of England (BOE) is considered less dovish than the Fed. Huw Pill, BOE's Chief Economist, said that U.K. services price inflation and wage growth remained uncomfortably strong, indicating that the central bank will be cautious when deciding to cut the rates.
GBP/USD was rising during the Asian and early European trading sessions and attempted to set a new high above 1.28650, following the release of better-than-expected U.K. Gross Domestic Product (GDP) growth figures.
Today's key event is the release of the US inflation report at 12:30 p.m. UTC. Economists polled by Reuters expect the report to show that headline prices rose by 0.1% in June while core prices gained 0.2%, with annual inflation pace at 3.1% and 3.4%, respectively.
Given that Powell has underlined the importance of seeing more progress in tackling inflation, while the market is highly confident of a 25-basis-point rate cut in September, the upcoming inflation report may severely impact the exchange rate of all USD pairs.
Higher-than-expected inflation figures may shock the market and push DXY higher, potentially bringing GBP/USD down towards 1.27800. If the figures align with the market's expectations or are slightly softer, GBP/USD may continue to rise, possibly reaching 1.29000 in the medium term.