Gold Falls as DXY Reaches a Seven-Week High on Strong US Economic Data
The gold (XAU) price lost more than 1% on Friday as the US Dollar Index (DXY) rose, and bond yields increased after data showed strong growth in US business activity.
According to Friday's S&P Purchasing Managers' Index (PMI) survey, business activity in the US reached a two-year high in June, supported by a tight labor market. As a result, the DXY rose to a seven-week high, making gold more expensive for holders of other currencies and decreasing the short-term demand for the bullion. Still, investors are not prepared to fully dismiss possible rate cuts by the Federal Reserve (Fed) this year. The market is pricing in a 66% probability of a rate cut in September.
This week, financial markets will be looking out for the US core Personal Consumption Expenditures (PCE) Price Index report, due this Friday. The PCE data is considered the Fed's preferred measure of inflation, so it may give more clues on the timing and scale of rate cuts. Additionally, traders should closely monitor comments from Fed officials throughout the week for any hints about future policy changes. Meanwhile, the physical market for gold showed some signs of weakness. Switzerland's customs data recently showed that the country's exports dipped in May compared to April due to decreasing shipments of gold to India and Hong Kong.
XAU/USD was essentially unchanged during the Asian and early European trading sessions. Today’s macroeconomic calendar doesn't feature any major events that might have a noticeable impact on the price of gold. Thus, the short-term bearish trend in XAU/USD may persist for a while. 'Spot gold is expected to retest support at $2,287 per ounce, as a bounce triggered by this barrier has completed around resistance at $2,358', said Reuters analyst, Wang Tao.
The Euro Dropped on Weak German PMI Data and Political Uncertainty
The euro (EUR) fell on Friday following weaker-than-expected German Purchasing Managers' Index (PMI) figures.
EUR/USD faces difficulty attracting significant buyers, weighed down by several factors. Political uncertainty in Europe and Friday's disappointing eurozone PMI numbers puts downward pressure on the euro. Additionally, the Federal Reserve's (Fed) relatively hawkish monetary policy stance strengthened the US dollar (USD) to a multi-week high, bringing down the euro. The US Dollar Index (DXY) surged to its highest level since 9 May following Friday's flash PMI, which revealed that US business activity reached a 26-month high in June. The data supports the Fed's cautious approach towards easing monetary policy, though reducing inflation pressures still makes a September rate cut probable. The possibility of a rate reduction may prevent USD bulls from making aggressive moves, potentially limiting the further decline of EUR/USD.
The euro remains under bearish pressure due to uncertainties surrounding the outcome of France's snap election. Political turmoil raises concerns about a potential new government worsening the fiscal situation in the eurozone's second-largest economy. Additionally, Friday's flash PMI numbers indicated a sharp slowdown in the growth of the eurozone business activity in June. Combined with the continued buying of the US dollar, these factors exert downward pressure on EUR/USD.
EUR/USD rose during the Asian and early European trading sessions. Today, traders will receive more clues on the health of the eurozone economy when Germany publishes its Ifo Business Climate report at 8:00 a.m. UTC. Better-than-expected figures will likely trigger a minor upward correction in EUR/USD but probably no higher than 1.07200. Conversely, worse-than-expected data will put an additional bearish pressure on the pair, potentially pulling it towards 1.06400.
JPY Plunges Towards Multi-Decade Low as US Economy Strengthens
The Japanese yen (JPY) lost 0.56% on Friday as the US Dollar Index (DXY) rose after Purchasing Managers' Indices (PMI) numbers came out higher than expected.
Friday's PMI data showed that US business activity surged to a two-year high in June, buoyed by a rebound in employment. Strong macroeconomic statistics and the Federal Reserve's (Fed) cautious approach to interest-rate cuts helped the DXY to reach a seven-week high. Meanwhile, the Japanese yen continued to weaken after the Bank of Japan (BOJ) surprised markets last week by delaying any cuts to its bond-buying program until July.
Furthermore, the US Treasury recently added Japan to a list of countries for potential labeling as a currency manipulator. It may mean that the US doesn't approve of BOJ's interventions in the financial markets. When attempting to support the yen and prevent it from hitting a new 34-year low, the central bank has spent some 9.8 trillion Japanese yen ($61.64 billion). Overall, even though investors still expect the regulator to increase its base rate this year, the fundamental pressure on USD/JPY remains bullish as the current interest rate differential favors the US dollar.
USD/JPY rose during the Asian and early European trading sessions, hitting a multi-decade high. No major events are scheduled today, so the bullish trend in the pair might persist. However, traders should stay alert for possible interventions by the central bank. Last Friday, Masato Kanda, Japan's top currency diplomat, said that Tokyo is ready to take further resolute action against 'speculative, excessive volatility'.