Gold Dropped Sharply After the US Retail Sales Report Was Released
The gold (XAU) price hit a 1-month low on Wednesday after strong economic data that boosted the US dollar and Treasury yields, reducing expectations of a rate cut by the Federal Reserve (Fed) in March.
US retail sales numbers rose in December, surpassing expectations and showing the economy's resilience as it enters the new year. After the release of the Retail Sales report, the US dollar remained near its 1-month high, coinciding with an increase in yields for the benchmark US 10-year Treasury notes. Bob Haberkorn, the senior market strategist at RJO Futures, said that the market's scepticism about the timing and possibility of interest rate cuts by the Fed is exerting downward pressure on gold prices:
"The markets are having doubts about interest rate cuts if the Fed can cut sooner than later, which is pressuring gold prices. With the dollar being strong and cuts taking time, it is hard for gold to hold a rally."
Nonetheless, he noted that geopolitical tensions will likely continue to support XAU/USD, and the pair will stabilise around 2,000. In the early Asian trading hours, XAU/USD rose slightly. Daniel Ghali, the senior commodity strategist at TD Securities, notes in a research report that robust purchasing activity in China supports the gold market. Today, traders should focus on the release of the US Initial Jobless Claims report at 1:30 p.m. UTC. Lower-than-expected figures may bring the gold price below 2,000. However, the local bearish trend in XAU/USD may reverse if the numbers are higher than expected. 'Spot gold may test resistance at $2,016 per ounce, a break above which could lead to a gain to $2,045,' said Reuters analyst Wang Tao.
Hawkish Comments From the ECB President Support the Euro
The euro (EUR) dropped below 1.08500 on Wednesday but recovered after the European Central Bank (ECB) President delivered a hawkish message in Davos.
Yesterday's US retail sales report caused a drop in EUR/USD as the release revealed the strength of the US economy and decreased expectations for an imminent rate cut from the Federal Reserve (Fed). However, Christine Lagarde, the president of the ECB, clearly stated in her speech at the World Economic Forum that the central bank will likely start cutting eurozone interest rates no earlier than summer 2024. The ECB head also warned that policy must stay restrictive for as long as necessary to ensure that inflation reaches the ECB's 2% goal in the medium term. According to a Reuters poll of economists, 45% of respondents believe interest rate cuts in the eurozone will begin in June. The long-term outlook is still dovish as traders price in roughly 130 basis points (bps) worth of rate cuts from the ECB by the end of 2024. However, it's less dovish than the expected US interest rate path.
EUR/USD was rising during the Asian and early European trading sessions. Today, traders should focus on several US reports at 1:30 p.m. UTC. Initial Jobless Claims and the Philadelphia Manufacturing Index reports will be the most important releases. If the data indicates the US labour market remains robust and the economy is strong, EUR/USD may drop below 1.08700. However, lower-than-expected figures may push EUR/USD higher, possibly above 1.09300.
GBP Rallies After Better-Than-Expected CPI Data
The British pound (GBP) gained 0.28% yesterday as the U.K. Consumer Price Index (CPI) came out higher than expected.
The U.K. CPI accelerated in December for the first time in 10 months, rising to 4.0% from 3.9% in November and denting market expectations for an early Bank of England (BOE) rate cut. According to the interest rate swap market data, traders are now pricing in just over 100 basis points (bps) worth of rate cuts in 2024, placing the BOE among the least dovish central banks. Investors don't expect the central bank to cut rates in Q1, so U.K. government bond yields rose sharply, with the 2-year yield jumping by more than 20 basis points—towards its highest level since 15 December. Not even better-than-expected US retail sales figures managed to slow the rally in GBP/USD.
GBP continued to rise during the Asian and early European sessions. Today, traders should focus on US data releases. Initial Jobless Claims and Philadelphia Manufacturing Index reports will come out at 1:30 p.m. UTC. If the data shows the resilience of the US labour market and the economy, GBP/USD may drop slightly. Worse-than-expected figures may push EUR/USD higher, possibly above 1.27200.