Gold Gains 0.52% on a Weakening US Dollar
Gold (XAU/USD) rose by 0.52% on Tuesday as the US dollar (USD) and Treasury yields declined slightly following weaker-than-expected US manufacturing data.
US Treasury bond yields declined for a second consecutive day on Tuesday as traders responded to weaker-than-expected manufacturing data and reduced inflation risks, driven by a drop in oil prices. This bolstered the demand for non-yielding gold. The New York Federal Reserve's (Fed) Empire State Manufacturing Index dropped sharply from its 29-month high in September towards −11.9 in October, marking the lowest level since May and signaling worsening economic conditions.
On Tuesday, San Francisco Fed President Mary Daly stated that the central bank has made considerable progress in controlling inflation and anticipates one or two more rate cuts this year, provided economic forecasts align. Meanwhile, Atlanta Fed President Raphael Bostic remarked that he doesn't see clear indicators of an impending recession, noting the continued strong performance of the US economy and that inflation is moving back towards the 2% target. Markets are currently pricing in a nearly 93% probability of a 25-basis-point rate cut in the federal funds rate in November.
XAU/USD continued to rise during the Asian trading hours. Today's trading session will likely be relatively quiet as the economic calendar features no major news releases.
"Spot gold is poised to revisit its 26 September high of $2,685 per ounce, as it has broken resistance at $2,666", said Reuters analyst Wang Tao.
Euro Continues to Struggle as ECB Rate Cut Looms
The euro (EUR/USD) continued to decline for the fifth consecutive day against the US dollar (USD) on Tuesday as traders believe that the European Central Bank (ECB) will pursue a more dovish monetary policy than the Federal Reserve (Fed).
The US Dollar Index (DXY) has now reached a two-month high on expectations that the Fed will proceed with only modest interest rate cuts over the next year and a half. Indeed, analysts bet that the dollar's ongoing rise will likely continue due to the lingering uncertainty surrounding global politics and the US election outcome.
'We think the trend for the greenback will remain intact as long as the macro data remains above water. Volatility and the US dollar tend to rise in tandem going into the US election, especially with the rise of (former US President) Trump in betting markets and the 50 basis-point (bps) cut being out of the picture for the Fed, at least in November. This would be the best case for the dollar in the short term", said Boris Kovacevic, global macro strategist at Convera.
On the contrary, the ECB will likely have to speed up monetary policy easing as economic conditions deteriorate and inflation falls short of the target. In fact, tomorrow, the ECB is now widely expected to deliver another 25-bps rate cut, a move that seemed unlikely at its last meeting in September.
"If the ECB does not cut in October, the market will think that the central bank is behind the curve and potentially making a policy error", said Deutsche Bank chief European economist Mark Wall.
EUR/USD was falling slightly during the Asian and early European trading sessions. An important event for EUR is tomorrow's ECB interest rate decision. Therefore, traders may refrain from placing large positions ahead of this event. Christine Lagarde, ECB President, will give a speech today at 6:40 p.m., and her comments might add some volatility to the market. Still, the event is unlikely to move the market significantly before tomorrow's decision and press conference. Fundamentally, the trend in EUR/USD will remain bearish as long as the pair is trading below 1.09540.
Japanese Yen Seems Ready to Reverse Due to BOJ Cautious Rhetoric
USD/JPY has been moving sideways within a narrow range of 149.000–150.000 on Tuesday, losing 0.36%.
USD/JPY retracted towards 149.000 after reaching 150.000 due to investors' reaction to comments made by Seiji Adachi, a Bank of Japan's (BOJ) board member. Adachi stated that conditions were already in place for the normalization of the monetary policy while emphasizing that the central bank should increase interest rates at a 'very moderate' pace. He cautioned that the BOJ should avoid a drastic policy change due to uncertainties regarding the global economic outlook and domestic wage growth. Earlier this month, the Japanese yen (JPY) came under pressure due to dovish signals from BOJ governor Kazuo Ueda and the opposition to further rate hikes from the new prime minister Shigeru Ishiba.
The Japanese yen also weakened against the US dollar (USD) amid expectations that the Federal Reserve (Fed) would be more cautious with more interest rate cuts. Recent data suggesting a resilient economy and slightly higher-than-expected inflation in September has led markets to reduce their expectations for aggressive monetary easing by the Fed. According to the CME FedWatch Tool, market participants currently price in approximately 92% chance for a 25-basis-point (bps) reduction in the federal funds rate at the 7 November meeting. The probability of no interest rate change is approximately 6%. Just a month ago, the market expected a 27% likelihood of a larger 50-bps decrease.
USD/JPY was rising from the 149.000 level during the Asian and early European trading sessions. Today, no significant events that could influence this pair are anticipated. However, tomorrow's US data—Retail Sales and Jobless Claims reports—at 12:30 a.m. UTC could increase volatility in USD/JPY.