Gold Falls to One-Week Low as USD Strengthens on Declining Rate Cut Hopes
The price of gold (XAU) fell by 0.91% on Wednesday, reaching its lowest point in a week. The decline was driven by a stronger US dollar and rising bond yields as investors lowered their bets on interest rate cuts by the Federal Reserve (Fed).
"At this point, the market may very well be responding to the firmer US dollar, and we continue to price in the possibility that the Fed is unlikely to move interest rates earlier in the summer", said Bart Melek, head of commodity strategies at TD Securities.
Indeed, Fed Governor Michelle Bowman suggested on Tuesday that holding interest rates unchanged longer might be sufficient to control inflation. However, she emphasised the central bank is ready to raise borrowing costs if needed. Higher interest rates increase the opportunity cost of holding non-yielding assets, such as gold, pushing their price down in the short term.
XAU/USD was essentially unchanged during the Asian and early European trading sessions. Today, the focus is on the US data, specifically Gross Domestic Product, Jobless Claims, and Durable Goods Orders data. Three reports will be released simultaneously at 12:30 p.m. UTC. Traders should particularly focus on the unemployment claims and durable goods data as they show a current picture of the US economy. In case the reports are stronger than expected—jobless claims are lower than 230,000, while the growth in core durable goods orders is higher than 0.2%—the chances of a rate cut by the Fed will decline, pushing XAU/USD higher.
Conversely, if the reports paint a bleak picture of the US economy, the gold price could correct upwards.
"Spot gold may keep falling into a range of $2,275–$2,286 per ounce, as it is riding on a steady downtrend", said Reuters analyst Wang Tao.
Also, today's highly anticipated debate between the two US presidential candidates may provide a turning point in the US election campaign and affect the markets.
Euro Struggles On Weak German Consumer Confidence Data
The euro (EUR) fell by 0.32% yesterday following a weaker-than-expected German GfK Consumer Confidence report.
German consumer confidence fell towards −21.8 for July, failing to meet the expected improvement towards −18.9 and slipping from the previous month's revised −21.0. Despite a gradual recovery in the German GfK Consumer Confidence survey numbers, Wednesday's disappointing result further weakened the already struggling euro.
"EUR/USD is in a 1.0660–1.0760 range, awaiting the first round of France's snap election on 30 June. Assuming none of the parties win an outright majority, a second round will be held on 7 July. The polls suggest President Emmanuel Macron's party will not secure an outright or relative majority", said DBS analyst Philip Wee.
Moreover, yesterday's US data revealed that new home sales for May didn't meet the expected numbers, but an upward revision for the previous month compensated for the shortfall. Additionally, US Treasury yields rose by 5–7 basis points across the curve. The auction of 5-year notes produced solid results, stopping through by 0.6 basis points with above-average non-dealer bidding, according to BMO Capital Markets. This indicates that investors are confident in the US economy and are willing to buy government bonds. Consequently, the market expectation of a rate cut by the Federal Open Market Committee (FOMC) at the meeting on 18 September decreased. The probability of at least a 25-basis-point rate cut has dropped to around 60%, down from just above 70% last week, according to the CME's FedWatch Tool.
EUR/USD rose during the Asian and early European trading sessions. Today, three key macroeconomic US reports—Gross Domestic Product, Jobless Claims, and Durable Goods Orders—will be released simultaneously at 12:30 p.m. UTC. Overall, these reports will provide a comprehensive snapshot of the US economy's health, influencing market sentiment and the EUR/USD's direction. Traders will closely analyse the data to understand the path of the US monetary policy, which could further impact the euro. If the data suggests economic weakness, EUR/USD may continue its upward trend. However, if the reports point out a strong US economy, EUR/USD could face downward pressure.
The British Pound Drops Below the Key Level as the US Dollar Rises
The British pound (GBP) lost 0.5% on Wednesday and dropped below a 100-day simple moving average price as the US dollar continued to rise despite weaker-than-expected home sales data.
GBP/USD has been moving in a bearish trend since mid-June as the divergence in monetary policy expectations between the Federal Reserve (Fed) and the Bank of England (BOE) has widened, favouring the greenback. Furthermore, GBP is under fundamental pressure due to the uncertainty surrounding the outcome of the U.K. elections, which are due next Thursday. Investors are unwilling to front-run the election results and place large orders in the British pound. Although the market believes that the opposition Labour Party will win a landslide election, there is uncertainty about their economic recovery plans and the potential impact on monetary policy. Currently, the central bank is under pressure to cut rates as annual inflation has slowed towards around 2%, while the economy stopped growing in April.
GBP/USD was rising slightly during the Asian and early European trading sessions. The pair will likely experience significant volatility today as Andrew John Bailey, the BOE Governor, will give a speech at 9:30 a.m. UTC, possibly providing clues on the future changes in monetary policy. Last month, Bailey said he was optimistic that data was moving in the right direction for a rate cut.
In addition, the US will release a string of important macroeconomic reports at 12:30 p.m. UTC: Gross Domestic Product, weekly Jobless Claims, and monthly Durable Goods Orders. All three reports will impact the US dollar, but the most important data is the labour market figures. If jobless claims exceed expectations, GBP/USD may rebound, possibly above 1.26500. Lower-than-expected results may extend the short-term bearish trend in GBP/USD and push the pair below the critically important 1.26000 level.