Gold Retreats from Record Highs on Surging US Dollar and Bond Yields
Gold (XAU/USD) fell by 1.24% on Wednesday as market participants took profit on long positions, triggering a technical pullback. Gold retreated from record highs, losing over 1% in the previous session due to several factors.
On Wednesday, the US dollar (USD) and Treasury bond yields surged to their highest levels in three months, prompting an intraday profit-taking pullback in gold. Strong US macroeconomic data indicated the economy remains resilient, diminishing expectations for aggressive easing by the Federal Reserve (Fed).
Additionally, recent remarks from key Fed officials suggest the central bank will move forward with modest interest rate cuts in the coming year. According to the CME FedWatch Tool, traders are now pricing in a 90% probability of a 25-basis-point (bps) rate cut by the Fed in November.
The BRICS summit, which concludes today, 24 October 2024, is significantly impacting XAU/USD due to discussions on de-dollarisation and the introduction of a gold-backed currency. Key topics at the summit include a roadmap for creating a multicurrency payment platform and plans to reduce reliance on the US dollar in global trade. A major proposal discussed is a potential currency backed by gold and the national currencies of BRICS countries, which would increase gold's role in international finance.
XAU/USD rose during the Asian trading hours. Today, traders should focus on the release of a series of Manufacturing and Services Purchasing Managers' Indices (PMIs). The US PMIs will be published at 1:45 p.m. UTC. Higher-than-expected figures will have a bearish impact on XAU/USD as they weaken the case for more rate cuts. Conversely, lower-than-expected numbers may push XAU/USD higher.
PMI Reports Will Test USD Strength Against EUR
The euro (EUR/USD) lost 0.15% against the US dollar (USD) on Wednesday as the greenback continued to strengthen on expectations of wider divergence in monetary policies between the European Central Bank (ECB) and the Federal Reserve (Fed).
EUR/USD has been declining since the end of September, with investors selling short-term rallies and rebounds. This decrease was caused by a run of positive US economic data, which has dampened expectations about the size and speed of rate cuts by the Fed. EUR/USD has now reached a three-month low partly due to rising prospects of Donald Trump's Presidency, which is expected to support the US dollar. Still, traders are beginning to doubt that the rally in the US dollar can continue much further from the current levels. ‘The bias for a stronger dollar in the short term probably from here is going to be more of potential Trump hedges rather than the rate story, which arguably is overblown’, said George Vessey, lead FX strategist at Convera.
At the same time, positive eurozone economic news is largely absent. Figures released yesterday showed that consumer confidence remained essentially unchanged in October with no signs of improvement. Meanwhile, ECB policymaker Robert Holzmann confirmed in an interview with Bloomberg yesterday that the ECB will almost certainly cut interest rates by 25 basis points (bps) in December.
EUR/USD was rising slightly during the Asian and early European trading sessions. Today, S&P Global Market Intelligence will release its highly anticipated Purchasing Managers' Indices (PMIs). PMIs will be published for several key economies—Germany, France, the U.K., the US, and the eurozone. The most important report is the US Composite PMI, due at 1:45 p.m. UTC. If figures are lower than expected, EUR/USD may rebound slightly but will probably remain below the 1.08280 level. Otherwise, EUR/USD will likely continue to decline, targeting 1.07600.
Yen Grows on Political Uncertainty and DXY Strength
The Japanese yen (USD/JPY) gained 1.11% yesterday. The pair reached its 3-month high due to political uncertainty leading up to the country's general election later this weekend.
The coalition government of Japan, led by Prime Minister Shigeru Ishiba, faces the risk of losing its majority in upcoming elections on Sunday, as indicated by recent polls. This potential change in the political landscape may further complicate the Bank of Japan's (BOJ) plans for monetary policy normalisation.
Kazuo Ueda, Governor of the BOJ, has stated that it remains necessary to take the time required to achieve the 2% inflation target in a sustainable manner. He has emphasised that interest rate hikes should be implemented cautiously and gradually while warning against moving too slowly, as this could lead to speculation and a further depreciation of the Japanese yen (JPY). At the same time, investors are reviewing data showing that private sector activity in Japan decreased for the first time in four months during October, with both the manufacturing and services sectors declining.
Kazuhiko Aoki, Deputy Chief Cabinet Secretary of Japan, has stated that the government is closely monitoring currency fluctuations as the yen has lost more than half of its gains since the government intervention in July. Internationally, the Japanese yen continues to be pressured by a stronger US dollar.
The greenback is driven by expectations for a more cautious approach by the Federal Reserve (Fed) to interest rate reductions and the possibility of Trump's victory in the upcoming elections. Shoki Omori, senior strategist with Mizuho Securities, said that given the expectation of the Fed maintaining higher interest rates than anticipated and the prospect of a Trump win, the US dollar will likely continue to dominate the market. This could result in USD/JPY reaching the 160.000 mark.
USD/JPY has been experiencing a slight correction towards 152.000 during the Asian and early European trading sessions. Today, the US Jobless Claims report at 12:30 p.m. UTC and US Manufacturing and Services reports at 13:45 p.m. UTC could increase volatility in the pair. Additionally, the Tokyo CPI report will be published at 11:30 p.m. UTC. A higher-than-expected figure could push USD/JPY higher, while softer data could give the pair a bullish momentum.