Soft US Inflation and Geopolitical Unrest Keep Gold Near Record Highs
The gold (XAU) price declined by 0.28% on Tuesday as the US Producer Price Index revealed weaker-than-expected figures.
Gold dropped to approximately $2,465 on Tuesday. Still, XAU/USD remained near record highs as softer US inflation data strengthened expectations for a larger interest rate cut by the Federal Reserve (Fed) in September. The annual producer inflation rate slowed towards 2.2% in July, down from 2.7% in June, approaching the Fed's 2% target. Escalating geopolitical tensions in the Middle East and at the Russia–Ukraine border continues to increase the appeal of the safe-haven asset.
Furthermore, the 10-year US Treasury yields dropped to a one-week low, providing additional support for gold. Despite some profit-taking, XAU/USD has still risen by 20% this year, fuelled by persistent geopolitical tensions and market volatility. Analysts, including those from Commerzbank, believe that gold will likely set a new record high, especially as upcoming inflation data may give the asset bullish momentum. Overall, reduced interest rates increase the attractiveness of non-yielding precious metals such as gold.
XAU/USD fell in the Asian trading session. Today, the most important event is the US Consumer Price Index (CPI) report at 12:30 p.m. UTC, which could offer insights into the Fed's plans for interest rate trajectory. A Reuters poll of economists projects a rise of 0.2% in monthly and annual CPI. Figures exceeding the recast will almost certainly bring XAU/USD below $2,450. Conversely, lower-than-expected numbers will likely cause a rally in XAU/USD, possibly pushing it towards $2,490.
Euro Increases on Soft US PPI Data
On Tuesday, EUR/USD reached the resistance level of 1.1000 and gained 0.56%. The US Dollar Index (DXY) lost 0.51%, breaking below the support level of 103.00 after the release of the US Producer Price Index (PPI) data.
US producer prices rose by 2.2% year-over-year in July 2024, lower than market expectations of 2.3%. The monthly PPI increased by 0.1% month-on-month in July, slowing from a rise of 0.2% in June and below forecasts of 0.2%. The data reinforced bets that the Federal Reserve (Fed) will have to lower interest rates soon. According to the CME FedWatch tool, there is a probability of 45.5% for a 25-basis-point (bps) reduction and a 54.5% chance of a 50-bps rate cut at the September meeting.
Important US Consumer Price Index (CPI) figures will be released later today and may affect market expectations.
"We expect the market to further support large interest rate reductions by the Federal Open Market Committee (FOMC) this year if the core CPI increases by less than 0.1% per month, whereas we expect the market to play down the core CPI if it rises by 0.2% or 0.3% per month", said Carol Kong, a currency strategist at Commonwealth Bank of Australia in a client report.
EUR/USD moved sideways during the Asian and early European sessions, hovering just below the resistance 1.10000 level. The market is awaiting the release of US CPI data for July today at 12:30 p.m. UTC. If CPI figures exceed expectations, the pair may experience a minor downward correction. Alternatively, if the data is lower than the forecast, the pair may rise above the 1.10000 level.
AUD Rises on Soft US Producer Inflation Data Ahead of the CPI Report
The Australian dollar (AUD) surged by 0.7% against the US dollar (USD) on Tuesday. AUD/USD's rise followed the decrease in Treasury yields after the US Producer Price Index (PPI) report reinforced beliefs that the Federal Reserve (Fed) will lower interest rates in September.
July's US PPI data showed a moderation in inflation, bolstering market confidence in the Fed's ability to cut interest rates and avoid an economic downturn. The data improved market sentiment and risk appetite, which is generally favorable for higher-yielding currencies like the Australian dollar. According to the CME Fedwatch Tool, investors now see a 55% chance of a 50-basis-point (bps) rate cut by the US central bank in September. In addition, Australian business conditions improved in July due to a rebound in employment, while annual wage growth remained at a solid 4.1% in Q2. Generally, the Reserve Bank of Australia (RBA) has all the reasons to remain hawkish for another two months, unlike the Fed. The latest interest rate swap market data implies only a 20% chance of a 25-bps rate cut by the RBA in September.
AUD/USD was relatively unchanged during the Asian and early European trading sessions. Today's key event is the US Consumer Price Index (CPI) report, due at 12:30 p.m. UTC. The market expects a 0.2% rise in monthly core inflation, with the annual figures at 3.2%. Commonwealth Bank of Australia (OTC:CMWAY) (CBA) analysts expect the US dollar to be in a holding pattern before the data release but then see risks tilted toward further weakness.
"We expect the market to double down on large interest rate cuts by the FOMC this year if the core CPI increases by 0.1% in a month or less, and we expect the market to largely play down the core CPI if it increases by 0.2% or 0.3%", Carol Kong, a currency strategist at CBA, wrote in a client note.
In other words, if inflation figures align or barely exceed the forecast, traders' rate cut expectations may change only slightly and will not significantly impact AUD/USD. Alternatively, lower-than-expected US inflation will likely push AUD/USD higher—possibly towards 0.67000. However, if the CPI numbers surprise the market and are higher than expected, AUD/USD may drop sharply below the important 0.66000 level.