Gold (XAU/USD) rose towards a record high on Tuesday as the US CB Consumer Confidence figures were lower than expected.
Weaker US macroeconomic data put significant downward pressure on the US dollar (USD), bringing it closer to its year-to-date low while pushing the gold price towards a new all-time high. Consumer Confidence Index dropped towards 98.7 in September, down from 105.6 in August, while the Present Situation Index declined towards 124.3 from 134.6.
A Richmond Federal Reserve (Fed) survey showed that manufacturing activity remained weak, with the composite index falling towards −21 in September from August's −19. The CME Group's (NASDAQ:CME) FedWatch Tool indicates that markets are pricing in over a 60% probability of the Fed cutting interest rates by another 50 basis points at the November meeting.
Additionally, ongoing geopolitical risks from conflicts in the Middle East and uncertainty surrounding the upcoming US presidential election are expected to support XAU/USD. Traders may await clearer signals regarding the Fed's potential rate cuts before placing large orders. This week's key events include speeches from influential Fed members, notably Fed Chair Jerome Powell on Thursday. Moreover, Friday's US Personal Consumption Expenditure (PCE) Price Index will likely impact USD demand and XAU/USD movements.
XAU/USD touched $2,670 today before pulling back as bulls took profits, with the daily chart showing slightly overbought conditions. Additionally, the current risk-on sentiment fueled by China's new stimulus measures has shifted some demand away from the safe-haven metal. However, a significant corrective drop appears unlikely due to ongoing expectations of more aggressive policy easing by the Fed. The US New Home Sales report today at 2:00 p.m. UTC may trigger some slight volatility.
"Spot gold may extend gains into $2,675 to $2,689 per ounce, as it has broken key resistance at $2,633", said Reuters analyst Wang Tao.
Euro Rises as Fed's Aggressive Rate Cuts Outpace ECB
The Euro (EUR/USD) gained 0.61% against the US dollar (USD) on Tuesday as a worse-than-expected Consumer Confidence report revived hopes for more rate cuts by the Federal Reserve (Fed), weakening the greenback.
Conference Board (CB) report showed that US consumer sentiment deteriorated sharply in September, falling towards a six-month low of 98.7 from an upwardly revised 105.6 mark recorded in August. The Consumer Confidence Index (CCI) was significantly below the expected 104 as worries over the US labor market health grew while inflation remained a concern for most households.
"If the Fed follows through with a relatively aggressive easing cycle over the next year, that could shore up consumers' optimism in the state of the economy and keep the economy from a hard landing", said Ben Ayers, senior economist at Nationwide.
Indeed, that is exactly what the market expects the Fed to do. The probability of another 50-basis-point rate cut at its next meeting on 7 November has increased to 60.2%.
Meanwhile, the European Central Bank (ECB) is still expected to gradually ease its policy despite the many economic challenges it faces.
"I would expect us to continue to gradually reduce interest rates in the coming time, also in the first half of 2025. I don't expect rates to return to the extremely low levels we saw before the pandemic. They will likely end up on a somewhat more natural level", said Klaas Knot, a Dutch ECB governing council member.
Either way, the divergence in monetary policy expectations between the ECB and the Fed continues to favor the euro, with bulls now targeting a key level of 1.12200—a 15-month high.
Today, the macroeconomic calendar is relatively uneventful. Still, the release of the US New Home Sales report at 2:00 p.m. UTC may add some volatility to USD-related pairs, including EUR/USD. Higher-than-expected figures may dent the bullish trend slightly but are unlikely to reverse it. Conversely, lower-than-expected results will almost certainly pull EUR/USD higher towards 1.12200.
Japanese Yen Reverses Ahead of the BOJ Meeting Minutes
USD/JPY renewed a two-week maximum yesterday but eventually closed the day with a 0.27% decline.
Kazuo Ueda, the governor of the Bank of Japan (BOJ), said on Tuesday that the central bank had ample time to evaluate market and economic conditions before adjusting its monetary policy. This suggests that the BOJ wasn't under pressure to make further interest rate hikes at the previous meeting, where the central bank maintained its policy rate at 0.25%, aligning with market expectations. Ueda also highlighted the potential risks posed by external factors, such as the growing volatility in financial markets and the uncertainty surrounding the US economy's ability to achieve a soft landing. Given these recent developments, the likelihood of an interest rate hike in October has diminished, although a rate increase in December remains possible.
In the meantime, the Japanese yen (JPY) has gained from the recent decrease in the US dollar. The release of a disappointing US Consumer Confidence report has raised expectations for further monetary easing by the Federal Reserve (Fed) and weakened USD. The spot and US Treasury 2-year yields have declined following a report indicating a decrease in US consumer confidence in September. If US economic data continues to come out weaker than expected, the 2-year yield could fall below its year-to-date low of 3.528%, reached 16 September when the spot rate dropped below 140.
USD/JPY has been correcting upwards during Asian and early European trading hours after yesterday's decline. Today, market participants are waiting for the BOJ Monetary Policy Meeting Minutes at 11:50 p.m. UTC. The data may give more insight into the BOJ's plans for monetary policy. Hawkish comments may support the Japanese yen, while a more cautious stance may push USD/JPY higher.