Gold Declines on Stabilising US Inflation and Easing Middle East Tensions
The gold (XAU) price fell by 0.68% on Friday after data showed that US inflation stabilized in April, increasing the chances of a rate cut by the Federal Reserve (Fed) in September.
XAU/USD fluctuates within a range near the three-week low reached on Friday. Gains for the pair remain limited due to generally positive risk sentiment and hopes for a ceasefire in Gaza. Traders also appear cautious, preferring to wait for this week's release of significant US macro data, including Friday's Nonfarm Payroll (NFP) report. Additionally, the Bank of Canada's (BOC) interest rate decision on Wednesday and the European Central Bank's (ECB) monetary policy meeting on Thursday will affect the price of non-yielding gold.
The recent US Personal Consumption Expenditures (PCE) Price Index inflation report showed slowing inflation. However, it was not enough to significantly increase the chances of a rate cut by the Fed, suggesting that the central bank might need more time to reach its 2% inflation target. At the beginning of the year, investors expected the first rate cut to be in March, but it has now been delayed until September. This situation has put downward pressure on XAU/USD, increasing the opportunity cost of holding a non-yielding asset. On the geopolitical front, Israeli Prime Minister Benjamin Netanyahu's administration reluctantly agreed to President Joe Biden's proposal for a Gaza ceasefire, even as the Rafah attack continued over the weekend, according to the BBC. Investors will monitor these developments, as escalating conflict could boost safe-haven flows and benefit gold prices.
XAU/USD was falling during the early European trading hours. Today, investors are waiting for the US ISM Manufacturing Purchasing Managers' Index (PMI) report at 2:00 p.m. UTC. Lower-than-expected figures could boost XAU/USD, potentially pushing the pair closer to 2,350. If the data surpasses expectations, the bearish trend in XAU/USD is likely to continue. According to Reuters analyst Wang Tao, spot gold may break support at 2,319 and decline towards 2,302.
The Euro Remains High Due to Hotter Eurozone Inflation and Weaker US Data
The euro (EUR) was volatile but gained slightly on Friday, as the better-than-expected Eurozone HICP inflation and lower-than-forecast US inflation data supported EUR/USD.
The Core Personal Consumption Expenditures (PCE) Price Index, which excludes food and energy prices, increased by 2.8% year-over-year, aligning with market expectations. This marks the lowest core inflation rate since March 2021. However, investors believe the Federal Reserve (Fed) needs more evidence to be confident that inflation will reach its 2% target before beginning to cut interest rates.
Meanwhile, the hotter-than-expected inflation in the eurozone might not stop the European Central Bank (ECB) from cutting interest rates this week. However, the regulator could signal a pause after a rate cut and pause rate reductions in the coming months. Financial markets have priced in nearly 25 basis points (bps) of rate reduction in June and 57 bps of cuts overall in 2024, according to Reuters. Traders will closely monitor ECB President Christine Lagarde's press conference on Thursday for new indications on the pace of rate cuts. Any dovish message from the ECB is likely to exert bearish pressure on the euro (EUR) and create a headwind for EUR/USD.
During the Asian trading window, EUR/USD rose but then declined in the early hours of the European trading session. Today, traders should focus on the US ISM Manufacturing Purchasing Managers' Index (PMI) data at 2:00 p.m. UTC. Stronger-than-expected numbers may reverse the local bullish trend and push EUR/USD down towards 1.08200. If the figures are lower than expected, EUR/USD may continue to rise.
GBP/USD Is Likely to Move Sideways Until a Breakout Sets a New Trend
Over the past week, GBP/USD has been moving sideways within the 1.27000–1.28000 range. On Friday, the pair rose by 0.08% after the Personal Consumption Expenditures (PCE) Price Index data, which weakened the US dollar.
Even though the PCE report showed that inflation is slowing, it still remains above the Federal Reserve's (Fed) 2% target, with the year-over-year rise in the PCE index reaching 2.7% in April. The data fuelled hopes that more than one rate cut will be delivered in 2024. After the publication of the PCE data, markets expect the Fed to cut the base rate by 37 basis points this year.
"If the Fed can cut because they can rather than because they have to stave off a recession, the markets should do well," said Brian Jacobsen, chief economist at Annex Wealth Management.
"The market will get impatient with the Fed's patience since the growth data suggests the Fed is waiting too long to recalibrate rates. They seem primed to seize defeat from the jaws of victory," he added.
A number of important data will be released this week: the US ISM Manufacturing Purchasing Managers' Index (PMI) data at 2:00 p.m. UTC today and Nonfarm Payroll data on Friday to measure the strength of the US labor market. Before the reports, GBP/USD is likely to continue moving within the 1.27000–1.28000 range. The breakout of the range will set the trend direction for the pair.