Gold Started to Recover After a Sharp Drop
Yesterday, gold rose by 0.25%. XAU/USD continues correcting upwards after a sharp drop due to the strong nonfarm payroll report released on Friday.
Strong US employment data and the suspension of gold purchases by China's central bank contributed to the largest daily drop in gold, which occurred on Friday. The People's Bank of China probably hasn't fully completed its diversification, gradually reducing the share of the US dollar in its currency basket. Most likely, China will become more cautious and selective when buying gold. Even though demand in China declined, the rest of Asia continues to buy gold despite the high prices. As industry representatives say, buyers are purchasing metal to protect themselves from geopolitical and economic uncertainty.
Investors are hesitant to take active action before the release of today's Consumer Price Index (CPI) report, which will help forecast the timing of interest rate changes. However, the most important events of the day are the Federal Reserve interest rate decision and the press conference. Overall, investors don't expect any changes in interest rates until autumn. Comments from Fed officials, economic projections, and the dot plot report may provide more clues on the US interest rate path. Additionally, the US CPI data will be published just a few hours before the Fed announcement. All this data may give the market a better understanding of the future US monetary policy and affect the Forex market.
There is currently a lot of uncertainty, and the market needs more data to define the possible XAU/USD trend. Globally, if the pair falls below 2,280, a decline towards 2,220 is likely. Conversely, XAU/USD may reach 2,380 if fundamental and economic data favor gold. Today's most important updates are the US Consumer Price Index (CPI) report at 12:30 p.m. UTC and the Fed interest rate decision at 6:00 p.m. UTC. These releases will likely cause increased volatility and affect gold. Until then, XAU/USD probably won't change much.
Euro Drops Towards a 6-Week Low Amid Rising Political Risks
The euro (EUR) reached a six-week low on Tuesday as the euro weakened due to rising political instability in the region.
Investors remain bearish ahead of key US CPI data and the Federal Reserve (Fed) interest rate decision risks. The snap elections in France added to existing uncertainty stemming from French budget deficits. The political turmoil drove German-French yield spreads wider as investors sought safer assets. The results of the E.U. election continued to increase safe-haven interest, also widening the German-Italian yield spreads. Moreover, German-US spreads increased, boosting the US dollar as safe-haven flows moved from the euro to the greenback.
The US Dollar Index (DXY) remained steady above 105.200 on Tuesday after rising for three consecutive trading sessions. Since Friday, the DXY has increased by more than 1% due to stronger-than-expected US jobs data, forcing traders to scale back their expectations for rate cuts by the Fed this year. The market now anticipates only one rate reduction, with a September cut becoming less likely.
EURUSD moved sideways during the Asian and early European trading sessions. Today, traders focus on two key events: the US Consumer Price Index (CPI) report at 12:30 p.m. UTC and the Fed interest rate decision at 6:00 p.m. UTC. Markets expect US CPI inflation to slow towards 0.1% month-over-month in April compared to 0.3% in March. Annualised core CPI is expected to decline towards 3.5% year-over-year from 3.6%. The Fed's upcoming rate decision and monetary policy statement will attract significant attention, but the most important data will be the so-called 'dot plot.' Investors are increasingly concerned that today's updates will reveal a shift in the dot plot, potentially excluding any rate cuts in 2024. If inflation exceeds expectations and the dot plot shows no planned rate cuts this year, EURUSD will likely drop significantly, possibly below 1.04500. Otherwise, the euro could reach 1.12000.
JPY Moves Sideways Ahead of Important US Releases
The Japanese yen (JPY) moved sideways on Tuesday as investors waited for today's US Consumer Price Index (CPI) report and Federal Reserve (Fed) interest rate decision.
The Japanese yen might gain some support from higher-than-expected Japanese Producer Price Index (PPI) numbers. The data revealed that producer prices increased by 2.4% year-on-year in May, surpassing market expectations of a 2% rise and increasing concerns about potential growth in consumer inflation. The Bank of Japan (BOJ) is anticipated to keep its monetary policy unchanged at Friday's monetary policy meeting. However, the interest rate divergence between the US and Japan continues to exert downward pressure on Japan's national currency, giving a bullish impulse to USD/JPY.
The US dollar stabilized on Tuesday after reaching a four-week high. The currency rebounded following Friday's stronger-than-expected nonfarm payroll report, which hinted at persistent inflation and strong economic growth. This makes it less likely that the US central bank will cut rates in the coming months. According to the CME FedWatch tool, markets are now pricing in roughly a 52% chance of a rate cut in September, down from 70% a week ago.
USD/JPY fell slightly during the Asian and early European trading sessions. Market participants are awaiting the key US Consumer Price Index (CPI) report due at 12:30 p.m. UTC and the Fed interest rate decision with updated economic projections. If inflation exceeds expectations and the dot plot shows no planned rate cuts this year, USD/JPY will likely continue to rise, possibly above 160.000. Otherwise, the pair could drop towards 152.500.