US Inflation Report Could Influence Gold Prices
Gold (XAU/USD) has been in a downward trend for the past three days. On Tuesday, XAU/USD declined by 0.8%, continuing a significant correction. The support level at $2,600 remains relatively stable, helping to limit the losses.
The recent drop in gold prices is due to the strengthening US Dollar Index (DXY), which gained bullish momentum following Donald Trump's victory. Markets anticipate that the Trump administration's policies could delay the timing of interest rate cuts in the US, prompting a shift in investments away from gold exchange-traded funds (ETFs) towards other assets. Investors closely monitor Trump's initial actions and cabinet selections for insights into his stance on tax cuts, trade tariffs, and immigration policies.
Today, all eyes are on the release of US consumer inflation data, which could significantly impact the DXY and broader financial markets. This week also includes key updates on producer inflation, speeches from Federal Reserve (Fed) officials, and US retail sales figures. Minneapolis Fed President Neel Kashkari has already commented on the potential impact of upcoming inflation data, noting that 'if inflation surprises to the upside between now and December, that might give us pause.' The CME FedWatch Tool recently showed that the probability of a 25-basis-point rate cut at the December 2024 meeting has fallen from 65% towards 58%.
Gold remains in a wait-and-see mode ahead of the US inflation report today at 1:30 p.m. UTC. XAU/USD may break below the $2,600 support level if inflation is higher than expected, potentially declining towards $2,580 or lower. Conversely, weaker data may push gold towards $2,630 or higher.
Trump's Policies and German Election Uncertainty Pressure the Euro
The euro (EUR/USD) lost 0.29% against the US dollar on Tuesday as the greenback continued to rise on expectations that Donald Trump's policies would accelerate US inflation.
It's still an extension of the post-election moves; the economic calendar has been relatively light, although it's picking up later in the week. For now, the market is focusing on the implications of a second Trump term, particularly policies that would be positive for the US dollar, such as potential higher tariffs,' said Vassili Serebriakov, an FX strategist at UBS in New York. Proposed deportations of immigrants and increased import tariffs are expected to drive inflation in the US, giving the Federal Reserve (Fed) less room to reduce interest rates. According to Decision Desk HQ, the Republican Party has secured a majority in the US House of Representatives. Trump's party will control both chambers of Congress, enabling the president-elect to advance his policy agenda. Trump has warned that European countries will 'pay a big price' for not purchasing enough American exports.
The euro is also facing additional downward pressure from political uncertainty. Germany, the eurozone's largest economy, will hold elections on 23 February after Chancellor Olaf Scholz's governing coalition collapsed due to disagreements over spending and borrowing plans. Fundamentally, investors now anticipate that the European Central Bank (ECB) is more likely to cut rates in the near term than the US central bank. The likelihood of an additional 25-basis-point rate cut before year-end is currently 70% for the ECB and 63% for the Fed.
EUR/USD was falling during the Asian and early European trading sessions. Today, the market will focus primarily on the US inflation report due at 1:30 p.m. UTC. However, several Fed officials' speeches will come out throughout the day and may trigger some volatility in all USD pairs. The market expects a 0.3% rise in monthly core Consumer Price Index (CPI) and a 3.3% annual increase. If CPI numbers exceed the expected, EUR/USD may drop slightly, probably towards 1.05910. If the data shows that inflation is slowing, EUR/USD will likely rise sharply, possibly towards 1.06600.
Aussie Stays Low Ahead of the US CPI Report
AUD/USD fell by 0.62% on Tuesday as the US dollar (USD) strengthened, driven by 'Trump trades'. These trades reflect traders' bets that Trump's inflationary policies may limit the Federal Reserve's (Fed) ability to lower interest rates.
The US dollar has been rising since Republican candidate Donald Trump won the presidential election, reaching its highest levels since May. Investors expect Trump's proposed policies, including tax cuts and import tariffs, to fuel inflation. With Republicans gaining more control in Congress, Trump will likely have more opportunities to implement his plans. This can also lead to interest rates staying higher for longer as markets anticipate a slowdown in rate cuts by the Fed. According to the CME FedWatch Tool, the likelihood of a 25-basis-point rate cut in December has dropped towards 60%, down from 84% last month.
Focus is likely to shift back to inflation and Fed policy later this week, but it remains uncertain if that will trigger an unwinding of Trump trades,' said Charu Chanana, Chief Investment Strategist at Saxo Bank. With markets already pricing in Trump's policies as inflationary, the market may be 'more sensitive' to hotter-than-expected CPI data. The core CPI is projected to increase by 0.3% in October.
AUD/USD traded sideways during the Asian and early European sessions as traders await the US CPI report at 1:30 p.m. UTC today, which is the most important economic event of the week. A higher-than-expected CPI figure may drive AUD/USD to new local lows, while weaker data could lead to an upward correction. Additionally, Fed Chair Jerome Powell will speak, followed by the release of Producer Price Index (PPI) data and retail sales figures on Thursday and Friday, respectively. All the data may affect AUD/USD.