Gold Reaches Record High on Fed Rate Cuts Anticipations
Gold (XAU/USD) reached a record high on Tuesday as expectations that the Federal Reserve (Fed) would begin its rate-cutting cycle in September increased. This pressured US Treasury bond yields and the US dollar (USD).
Markets are anticipating a total of 100 basis points (bps) in rate cuts by the US central bank over the three remaining policy meetings this year. Dovish outlook is driven by easing inflationary pressures and a weakening labour market.
However, there's debate over whether the Fed will opt for a 25 or a 50-bps cut at its September meeting, especially after robust July retail sales data.
Fed Governor Michelle Bowman sought to downplay expectations of an imminent rate cut, emphasising that despite recent progress, inflation remains elevated and continues to be above the central bank's 2% target.
The People's Bank of China (PBOC) recently issued new gold import quotas to several Chinese banks, signalling a potential surge in demand and hinting at another gold buying spree from China.
Additionally, holdings in the SPDR Gold Trust (NYSE:GLD), the world's largest gold-backed exchange-traded fund, climbed to a seven-month high of 859 tons, indicating growing financial investment interest.
Meanwhile, ongoing geopolitical tensions in the Middle East and the possibility of a ceasefire between Israel and Hamas keep investors cautious, further supporting the safe-haven appeal of XAU/USD.
XAU/USD rose during the Asian trading session. Today, traders should focus on two key events. The first is the Preliminary Benchmark Revision to Establishment Survey Data, due at around 2:00 p.m. UTC.
The report includes revisions to nonfarm payroll numbers between April 2023 and March 2024. If the report reveals that significantly fewer jobs were created than initially reported in the monthly payroll data, it could amplify the Fed Chair's concerns in his upcoming remarks.
The second event is the FOMC minutes at 6:00 p.m. UTC, which could provide insights into the Fed monetary policy direction. The dovish tone could continue to push gold higher, while hawkish remarks may break the XAU/USD bullish trend.
Euro Grows for the Third Consecutive Day
EUR/USD continued its upward trend on Tuesday. The pair gained 0.40% and broke above the 1.11000 resistance level, marking the third consecutive day of growth.
Federal Reserve (Fed) Chair Jerome Powell is expected to provide insight into the potential for interest rate reductions in his speech at the annual Jackson Hole Economic Symposium this Friday.
However, the release of revised employment data on Wednesday could influence his message on whether the slowdown in the labour market signals sufficient concerns about the economy.
Quincy Krosby, chief global strategist at LPL Financial, said that if the report shows a significantly lower number of new jobs than previously reported, the chair's concerns could be amplified.
A weak monthly nonfarm payroll report at the beginning of the month acted as a catalyst for increased volatility. It prompted traders to reevaluate the prospects of a 0.5% interest rate reduction by the Fed at its meeting in mid-September.
According to the CME FedWatch Tool, the chances of a 50-basis-point rate cut were 71%. However, subsequent macroeconomic data releases have reversed the expectations. Now, 72% of traders expect a 25-bps reduction, and only 28% anticipate a 50-bps cut.
EUR/USD slowed down during Asian and early European trading sessions. Market participants are preparing for possible further shocks, as revised data is expected to be released today at 2:00 p.m. UTC.
If the figures are significantly lower than in the previous monthly report data, it may substantially impact Powell's rhetoric at the Jackson Hole Symposium on Friday.
Also, the release of the FOMC minutes at 6:00 p.m. UTC could provide insights into the Fed's stance on the monetary policy. Hawkish rhetoric will put bearish pressure on EUR/USD, while a dovish tone will support the current bullish trend.
Canadian Dollar Drops Despite Softer Canadian Inflation Data
The Canadian dollar (CAD) gained another 0.12% against the US dollar (USD) on Tuesday despite a weaker-than-expected Canadian Consumer Price Index (CPI) report.
Yesterday’s report showed that the Canadian annual inflation rate fell towards a 40-month low of 2.5% in July. Core inflation also decreased, indicating that the Bank of Canada (BOC) may lower interest rates in September.
However, the report had no bullish impact on USD/CAD as investors continued to sell the greenback, anticipating rate cuts by the Federal Reserve (Fed). ‘The prospect of a weaker labour market is why traders continue to price in the potential for a 50-basis-point cut in September.
People thought the Fed was behind the curve in raising rates, and now many people think the Fed is behind the curve in cutting rates’, said Marc Chandler, chief market strategist at Bannockburn Global Forex.
Overall, the Fed is still expected to pursue a more dovish monetary policy than the BOC. This divergence in monetary policy expectations is supporting AUD.
USD/CAD continued to fall during the Asian and early European trading sessions. Today, the focus is on two events. The US Bureau of Labor Statistics (BLS) will release the 2024 Preliminary Benchmark Revision to Establishment Survey Data at around 2:00 p.m. UTC, which includes revisions to historical nonfarm payroll numbers.
Goldman Sachs economists expect that 600,000 to 1 million fewer jobs were created from April 2023 to March 2024 than previously reported. If BLS revisions are less severe than the market expects, the US dollar should strengthen and USD/CAD will likely rise towards 1.36400. Conversely, larger-than-expected revisions will likely push the pair even lower, possibly below 1.36000.
The second event is the Federal Open Market Committee (FOMC) meeting minutes at 6:00 p.m. UTC. Although past events may have little impact on the current exchange rates, the protocols of the previous policy meeting may shed light on the sentiment inside the Fed and how eager the members were to start cutting interest rates. If the protocols reveal a dovish stance among FOMC members, USD/CAD may continue to move lower slightly.
Conversely, if the minutes show that the Fed is reluctant to reduce the rates, USD/CAD may correct sharply upwards.