Gold May Drop Below 2,000 if US Data Continues to Be Strong
XAU/USD rose by 0.32% last Friday but still recorded its biggest weekly decline in 6 weeks as strong US macroeconomic data and hawkish messages from Federal Reserve (Fed) officials lowered expectations of an early rate cut.
Market expectations of US monetary policy remain the most important factor affecting XAU/USD's price as the market speculates when the Fed will deliver a rate cut. Traders now price in around a 44% chance of the rate cut in March, dropping from 71% last week, according to the CME Fed Watch Tool.
Gold is declining as the possibility of the rate cut decreases because the high base rate puts downward pressure on the non-yielding metal. 'Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction,' said Ole Hansen, the Saxo Bank's head of commodity strategy.
XAU/USD was falling during the Asian and early European trading sessions. Today, the volatility in gold may be relatively low as the macroeconomic calendar is uneven. However, several releases later this week will noticeably affect XAU/USD.
The pair has decently declined due to improved US consumer sentiment, solid labor market data, and strong retail sales figures, indicating the US economy's resilience. The Purchasing Managers' Index will come out on Tuesday, and inflation data will be released on Friday. If figures are higher than expected, it will support the view that there will be fewer rate cuts in 2024. Thus, XAU/USD may move lower—possibly below the critical 2,000 mark.
The Euro Moves Higher as the US Dollar Retreats
On Friday, the euro's (EUR) price rose by 0.21% as the US dollar slightly declined, pausing after rising for five consecutive trading sessions.
The US Dollar Index (DXY), measuring the US dollar exchange rate against six other major currencies, dropped by 0.08% towards 103.26 on Friday. Still, the DXY gained 0.8% last week, while the euro depreciated. The US economy remains strong despite high-interest rates.
Last week's releases showed a strong Michigan Consumer Sentiment report and labor market data, decreasing expectations of a rate cut in Q1 below 50%. Investors are now considering May to be the month when the Fed will announce the first rate cut. Fed officials, including Governors Waller, Goolsbee, and Daly, emphasized the need to assess inflation data carefully and suggested it's premature to expect rate reductions.
Meanwhile, J.P. Morgan advanced its forecast for the European Central Bank (ECB), shifting anticipations of rate cuts from September to June. However, the firm maintained a cautious stance regarding inflation and wage growth trends. 'To avoid raising the number of cuts from 3 to 5, we assume that the ECB skips July and then starts back-to-back cuts in September,' commented an economist, Greg Fuzesi.
EUR/USD was rising during the Asian and early European trading sessions. Today, traders should focus on ECB President Christine Lagarde's speech at 2:00 p.m. UTC. Any indication that the ECB is prepared to keep the monetary policy tight for longer will have a bullish impact on the EUR/USD. However, the euro may drop if statements are more dovish-like.
The Japanese Yen Holds Steady Ahead of the BOJ Interest Rate Decision
The Japanese yen (JPY) continued to consolidate in the 148.200 area in a relatively quiet trading session on Friday.
USD/JPY has been trading sideways for the past 3 trading sessions as traders refrained from placing large orders in JPY pairs ahead of the Bank of Japan's (BOJ) interest rate decision on 23 January.
Although the market largely anticipates the regulator to leave its ultra-loose monetary policy unchanged, traders also wait for clear forward guidance on the future path of interest rates. Last time, the BOJ surprised the market by not providing any signals about future policy changes, resulting in a USD/JPY rally.
This time, the Japanese central bank may have to provide at least some hawkish signals because the JPY has depreciated by over 5% since the beginning of the year. Fundamentally, monetary policy is a bearish factor for USD/JPY as BOJ's stance appears to be getting more hawkish than the Federal Reserve's (Fed).
USD/JPY was declining slightly during the Asian and early European trading sessions. Today, the formal macroeconomic calendar is uneventful, so the pair may continue to move in a tight range until the BOJ interest rate decision on the morning of 23 January. However, the short-term technical bias remains bullish as the USD/JPY trades above an important level of 147.600.