Gold Retreats From an All-Time High as Bulls Take Profit
The gold (XAU) price increased by 0.42% on Monday, setting a new all-time high but failing to hold above 2,445.
The combination of several bullish factors helped gold achieve a new milestone yesterday. Expectations of imminent rate cuts by the Federal Reserve (Fed), China's stimulus measures, and geopolitical uncertainty increased the demand for bullion and other precious metals. 'Inflation is sticky. We may see some whipsaws in the inflation data, but also the burdening debt in the US— there is a cause to be diversified away from that, too. So it's this perfect storm that's kept the market elevated in gold,' said Daniel Pavilonis, senior market strategist at RJO Futures.
Indeed, growing concern about the rapidly rising US government debt is partly behind the recent surge in gold prices. According to the Congressional Budget Office, the US budget deficit widened to $1.7 trillion in 2023 and is on track to reach $2.6 trillion by 2034. Meanwhile, US government debt may soon reach a record 106% of gross domestic product (GDP) in 2028. The rapid growth of US government debt is pushing investors away from fiat currencies into precious metals and other alternatives. Traders' belief that the Fed would cut its base rate twice in 2024 also supports XAU/USD. Furthermore, safe-haven flows rose following the death of Ebrahim Raisi, President of Iran.
XAU/USD was falling during the Asian and early European trading sessions. Today, the economic calendar doesn't feature any major releases, but traders should remain cautious of any new developments on the geopolitical front. Also, several Fed officials will be giving speeches today, potentially offering clues on the future changes in US interest rates.
"Spot gold may test support at $2,405 per ounce, a break below which could trigger a drop to $2,392," said Reuters analyst Wang Tao.
Euro Corrects But Remains Within a Bullish Trend
The euro (EUR) lost 0.14% on Monday as the US dollar rose due to increased safe-haven demand.
Although EUR/USD continues to move within a major bullish trend, a bearish correction that began last Thursday is still ongoing. Fundamentally, the divergence in monetary policy between the Federal Reserve (Fed) and the European Central Bank (ECB) still favors the US dollar because the market expects the ECB to deliver more rate cuts in 2024. Furthermore, Fed officials have recently started to sound more cautious, saying that inflation remains a problem.
"It is too early to tell whether the recent slowdown in the disinflationary process will be long-lasting," said Fed Vice Chair Philip Jefferson.
Meanwhile, the ECB is prepared to deliver the first rate cut in June but says that further rate cuts are less certain.
"Depending on the incoming data and our new Eurosystem staff projections, a rate cut in June may be appropriate. But the path beyond June is much more uncertain," commented Isabel Schnabel, ECB board member.
EUR/USD rose slightly during the Asian and early European trading sessions. Today's key events are the upcoming speeches by Fed officials, which might offer some guidance on future changes in US monetary policy. If they reiterate their colleagues' hawkish stance, EUR/USD may continue to decline, possibly dropping below the important 1.08200 level.
Today's CPI Report Will Likely Increase Volatility in CAD Pairs
The Canadian dollar (CAD) moved sideways on Monday, with momentum remaining limited as Canadian markets were closed for the Victoria Day holiday.
The US Dollar Index (DXY) rose on Monday after Atlanta Federal Reserve (Fed) President Raphael Bostic stated that it would take some time before the central bank ensures that inflation returns to 2%. He reiterated other officials' comments that only one rate cut would be necessary this year. Nevertheless, traders maintained their views that the Fed would deliver rate reductions in September and November. Investors are now focusing on upcoming central bank commentary and the latest FOMC minutes tomorrow to gain more clarity on the monetary policy outlook.
The USD/CAD slightly rose on Monday, rising towards 1.36250, as the US dollar (USD) strengthened due to safe-haven demand. Markets were concerned by reports from Reuters that the President of Iran, Ebrahim Raisi, had died in a helicopter accident in Northern Iran over the weekend. Additionally, Russia’s decision to open a second front in the Kharkiv region has heightened tensions. Russian President Vladimir Putin’s visit to Beijing and the warm communication with Chinese President Xi Jinping highlight geopolitical divisions and growing estrangement between the Western and BRICS countries. These developments may affect global peace, economic communications, and trading routes.
USD/CAD was rising during the Asian and early European trading sessions. Today, Statistics Canada will release a highly anticipated Consumer Price Index (CPI) report for April at 12:30 p.m. UTC, which may provoke sharp moves in all CAD pairs. The market expects the report to show a 2.7% rise in annual inflation. If the CPI figures are higher than expected, investors may lower their expectations for a rate cut by the Bank of Canada this summer. Thus, USD/CAD may decline sharply, possibly below 1.36000. If the report reveals that the underlying price pressure is easing, the chances that the Canadian central bank will begin cutting rates early this year will strengthen. In this case, USD/CAD may move higher and possibly break above 1.36500.