Gold Hit a Weekly High as Traders Await Today's US CPI data
The gold (XAU/USD) price rose to a new weekly high on Tuesday, supported by a combination of factors.
XAU/USD maintained a positive bias for the second consecutive day on Tuesday, hovering near the weekly high around $2,520. However, the upward momentum appears limited, as traders are cautious and avoid placing large orders ahead of the key US Consumer Price Index (CPI) release later today. The CPI report will be critical in shaping expectations regarding the size of the Federal Reserve's potential rate cut at the upcoming 17 – 18 September policy meeting. Thus, the data could significantly impact non-yielding assets like gold.
Democratic Vice President Kamala Harris and Republican Donald Trump faced off in a highly anticipated US presidential debate. They discussed key issues such as abortion, the economy, immigration, and Trump's ongoing legal challenges. While the debate is not expected to have an immediate impact on monetary policy, investors are closely watching both candidates' fiscal policies and economic plans. Harris' late entry into the race, following President Joe Biden's withdrawal in July, has intensified the competition. Her candidacy has led to a reversal of trades previously positioned on expectations of a second Trump presidency.
XAU/USD rose during the Asian trading session. Today, the main event is the US CPI report due at 12:30 p.m. UTC. Lower-than-expected figures could increase the chances of a 50-basis-point rate cut by the Fed in September, potentially pushing XAU/USD higher. Conversely, unexpectedly high inflation might temporarily reverse the bullish trend in gold.
"Spot gold may revisit its 6 September high of $2,529 per ounce, as it has briefly pierced above the last barrier of $2,521 towards this high", said Reuters analyst Wang Tao.
Euro Moves Sideways While the Market Digests US Debates and Awaits CPI
EUR/USD has been trading sideways in a range of 1.10200–1.10500 on Tuesday due to a lack of events throughout the day and in anticipation of the Harris-Trump debates later on Tuesday night.
Investors generally took the US presidential debate between Donald Trump and Kamala Harris in stride, with limited details but plenty of jabs. The PredictIt, an online prediction market, showed that Trump's perceived chances of winning the US general election decreased towards 47% compared to 52% before the debate. Harris' chances increased towards 56%, up from 53%. This has led investors to remain anxious until the November elections as they try to evaluate the economic policies of both candidates and determine which may ultimately win.
The Federal Reserve (Fed) is expected to lower interest rates next week. However, there is still significant uncertainty regarding the size of the reduction. Market participants anticipate a 50-basis-point (bps) reduction with around 30% probability and a 114-bps reduction overall by the end of the year.
EUR/USD has continued to move sideways during Asian and early European trading sessions today in a range of 1.10200–1.10500. Although the Fed focuses on employment data, the market will closely watch the US Consumer Price Index (CPI) report today at 12:30 p.m. UTC. The CPI numbers are forecasted to be at 2.5% year-on-year. If the data is higher than expected, it may put bearish pressure on the EUR/USD, while softer data may push the euro towards 1.11000.
Safe-Haven Flows and Monetary Policy Divergence Fuel Japanese Yen Decline
The Japanese yen (USD/JPY) gained 0.52% against the US dollar (USD) on Tuesday as traders repositioned ahead of US key inflation data.
USD/JPY continued to fall during the Asian and early European trading sessions, hitting a new nine-month high. Traders attributed the decline to rising safe-haven flows into the yen after PredictIt, an online prediction market, showed that Donald Trump's perceived chances of winning the election race declined towards 47% following the debate with Kamala Harris.
At the same time, traders may have repositioned and closed their tactical long positions in the US Dollar Index (DXY) ahead of the release of the US Consumer Price Index (CPI) report. While neither the debate nor the CPI report will likely affect the Federal Reserve's (Fed) monetary policy, the events are still a source of uncertainty. Therefore, investors prefer to err on the side of caution and remain on the sidelines.
Fundamentally, USD/JPY remains under strong bearish pressure due to divergence in monetary policy expectations between the Fed and the Bank of Japan (BOJ). The market expects the Fed to cut borrowing costs in half by mid-2025 but anticipates the BOJ raise its key rate by 25 basis points over the same period. However, the prospect of BOJ's potential interest rate increase may ease as the Japanese yen continues to strengthen.
Today, traders should focus on the US Consumer Price Index (CPI) report due at 12:30 p.m. UTC. The market expects headline CPI figures to slow towards 2.6% year-on-year and the core inflation rate to remain unchanged at 3.2%. Higher-than-expected figures may pull USD/JPY higher but are unlikely to change the overall bearish trend. Conversely, lower-than-expected results may potentially push the pair below the 140.000 level.