Gold Gains 1.08% on Geopolitical Tensions and Weak US PMI Data
Gold (XAU/USD) increased by 1.08% following rising geopolitical tensions and weak US macroeconomic data.
Yesterday, gold hovered near record highs, driven by safe-haven demand as fears of a full-scale war in the Middle East escalated after Iran launched missiles targeting Israel. Israel reported that over 180 ballistic missiles were fired on Tuesday in retaliation for its military operations against Tehran's Hezbollah allies in Lebanon. In response, the Israeli military announced on Wednesday that it would ramp up airstrikes throughout the Middle East and vowed to retaliate against Iran.
Recent US economic data painted a mixed picture. The ISM Purchasing Managers' Index (PMI) revealed a steep decline in the US manufacturing sector, possibly offering the Fed more room to cut rates further. Meanwhile, a surprise surge in job openings towards 8.04 million exceeded expectations. Adding to the uncertainty, Federal Reserve (Fed) Chair Jerome Powell hinted that future cuts would be more restrained, likely limited to only 0.25% adjustments.
XAU/USD fell sharply during the Asian and early European trading hours. Today, traders should pay attention to the ADP Employment Change report at 12:15 p.m. UTC. The report will provide insights into the current state of the US labor market, potentially influencing investors' interest rate expectations and affecting XAU/USD. If the data exceeds expectations, the chance of a 50-basis-point rate cut in November may decrease, likely bringing XAU/USD below $2,640. If the figures are weaker than expected, it could bolster the case for a larger rate cut and push gold higher towards $2,660.
"Spot gold may retrace into a range of $2,641 to $2,646 per ounce as the correction from the 26 September high of $2,685 looks incomplete", said Reuters analyst Wang Tao.
Geopolitical Turmoil and Economic Indicators Fuel Euro's Decline
The euro (EUR/USD) plunged by 0.6% against the US dollar (USD) on Tuesday as flows into safe-haven currencies increased due to rising geopolitical instability in the Middle East. Additionally, the greenback strengthened on data showing a resilient US labor market.
Yesterday, Iran launched missiles towards Israel in retaliation for Israel's military campaign against Tehran's Hezbollah allies in Lebanon. The market reacted with a typical risk-off move, driving the US Dollar Index (DXY), gold, and crude oil prices higher while selling riskier assets, such as equities and most other major currencies.
EUR/USD experienced additional bearish pressure on the macro level after the US JOLTs Job Openings report figures were stronger than expected, indicating that the US economy was still solid. After Jerome Powell's, the Chairman of the Federal Reserve (Fed), speech in which he pushed back against another 50-basis-point (bps) rate cut in November, the divergence in monetary policy expectations between the European Central Bank (ECB) and the Fed is equalizing. In other words, investors are beginning to expect fewer rate cuts by the Fed but anticipate the ECB to turn more dovish in the month ahead. This is putting downward pressure on EUR/USD.
EUR/USD continued to fall during the Asian and early European trading sessions. Today, several ECB officials, including Vice President Luis de Guindos and Chief Economist Philip Lane, will give speeches throughout the day. Furthermore, four Fed officials will also speak between 1:00 p.m. and 4:00 p.m. UTC. The Fed representatives will likely receive more attention, so EUR/USD volatility may rise during the American trading session.
Japanese Yen Moves Sideways Due to BOJ Monetary Policy Ambiguity
USD/JPY has been moving sideways within 143.000–144.500, reflecting the ongoing uncertainty about the future trajectory of the Bank of Japan's (BOJ) interest rate adjustments.
The new Minister of Economy in Japan has emphasized the importance of being cautious when considering raising interest rates. He stated that changes in the base rate should be done gradually, as a rapid exit from deflation could have negative consequences. Additionally, the new Prime Minister, Shigeru Ishiba, has indicated that he doesn't support raising rates unless certain conditions are met. His goal is to assist individuals and businesses by supporting higher prices and promoting a gradual economic recovery.
Investors in Japan will closely monitor consumer confidence indicators for September to gain a better understanding of the current state of the economy. This information will provide more insights into the economic outlook. Furthermore, the Japanese yen (JPY) has weakened against other currencies due to the ongoing tensions in the Middle East. Continuing escalation caused investors to flee into safe-haven assets, resulting in a decline in the yen's and other major currencies' value.
USD/JPY continues to move sideways during Asian and early European trading hours. The market is waiting for the US ADP Employment Change report today at 12:15 p.m. UTC. This data is a good predictor of the upcoming Nonfarm Payroll report. Strong data may trigger new bullish momentum in USD/JPY, pushing the pair towards 145.000. Lower-than-expected figures may bring the pair down towards 142.000.