Gold Retreats on Uncertainty About the US Inflation Pace
On Friday, gold (XAU) continued its rally, which had started on Thursday. However, the gold price slightly corrected downwards due to the end of the week.
The University of Michigan Consumer Sentiment Index fell from 77.2 to 67.4 in May, the lowest in six months. The significantly lower data than the expected 76 supported XAU/USD. Moreover, the chances of rate reductions this year have increased following softer-than-anticipated job creation in the US in April and a weaker-than-expected Jobless Claims report last week. According to the CME FedWatch Tool, there is now a 61.2% probability of a rate cut by the Federal Reserve (Fed) in September. Additionally, escalating tensions in the Middle East have strengthened the appeal of safe-haven assets.
The US Producer Price Index (PPI) and Consumer Price Index (CPI) data are scheduled for release this week. The PPI is expected to show a 0.3% increase in core consumer prices compared to the previous month, while the CPI is projected to rise by 0.4%. These figures would bring the annual inflation rate down to around 3.6%. City Index senior analyst Matt Simpson suspects the inflation rate will hold longer than the market expects. 'It just won't disinflate as quickly as doves hope. And that could result in some choppy trade for gold prices around these highs, at a time of year usually associated with negative returns for gold prices,' Simpson stated.
XAU/USD continued its downward correction in the Asian and early European trading sessions today. The market is awaiting the release of the CPI and PPI data for April to gain further clarity on the Fed's monetary policy stance, given concerns expressed by several officials regarding potential easing measures.
The Euro Falls on Hawkish Fed and Rising US Inflation Expectations
On Friday, the euro (EUR) declined due to hawkish remarks from the Federal Reserve (Fed) officials and higher-than-expected US Inflation Expectations data.
US Treasury yields rebounded sharply after Dallas Fed President Lorie Logan commented that current monetary policy might not be sufficiently restrictive to combat inflation. This view was supported by the sharp increase in one-year Consumer Inflation Expectation figures for May, which rose from 3.2% to 3.5%—the highest level since November 2023. Meanwhile, US Consumer Sentiment numbers plunged from 77.2 to 67.4, reaching their lowest point since November. The drop occurred primarily due to escalating concerns about inflation. The US dollar also received additional support from a weakening Japanese yen (JPY). Over the past week, the US Dollar Index increased by 0.23%.
Yannis Stournaras, ECB policymaker and Governor of the Bank of Greece, indicated last week that he anticipates three rate cuts this year, with a possible first reduction in July. He said a stronger-than-expected economic rebound in Q1, with a Gross Domestic Product growth rate rising by 0.3%, supported this outlook. In contrast, Robert Holzmann, member of the ECB Governing Council and Governor of Austria's central bank, expressed a more cautious stance, warning against reducing the interest rate too hastily or significantly.
EUR/USD was moving sideways during the Asian and early European trading sessions. The rest of the day will likely remain relatively quiet as the economic calendar is rather uneventful. Most traders are preparing for the US Consumer Price Index (CPI) report, which will be released on Wednesday. The short-term technical bias remains neutral as EUR/USD continues to trade within the narrow 1.07660–1.07760 range.
British Pound Consolidates Above 1.25000 But Fails to Rise Higher
The British pound (GBP) was essentially unchanged on Friday, even as the US Dollar Index (DXY) rose despite the lower-than-expected Consumer Sentiment Index.
GBP/USD has been on an uptrend lately. The pair rose on Thursday after worse-than-expected US initial jobless claims figures fuelled expectations that the labor market was loosening. In addition, better-than-expected U.K. GDP figures strengthened the British pound. Still, the market is guessing whether the Federal Reserve (Fed) will be willing to pursue a more dovish monetary policy in 2024 as inflation remains elevated. Lorie Logan, Dallas Fed President, said on Friday that it wasn't clear whether monetary policy was tight enough to bring inflation down to the US central bank's 2% target, and it was too soon to cut interest rates. Her comments generally supported the US dollar.
Meanwhile, the market continues to believe that the Bank of England (BOE) will deliver at least two 25-basis-point (bps) rate cuts in 2024. Indeed, the divergence in monetary policy expectations between the Fed and the BOE continues to favor the US dollar.
GBP/USD was relatively unchanged during the Asian and early European trading sessions. Today's economic calendar doesn't feature any major events that could potentially impact the exchange rate of GBP pairs. However, traders should pay attention to the upcoming speeches by Fed officials. Philip Jefferson and Loretta Mester will deliver comments at 1:00 p.m. UTC today, which may shed some light on the future path of US interest rates. The technical bias remains bullish as GBP/USD moves above the important intraday level of 1.24900.