Gold Climbs By 1.5% on Rising Geopolitical Tensions and Hopes of Rate Cuts
Yesterday, gold (XAU) rose by 1.5%, staying near record highs. This was due to expectations of a softer US monetary policy and increased safe-haven demand.
The Federal Reserve (Fed) held US interest rates steady on Wednesday as expected, indicating that recent economic trends—progress in reducing consumer prices and a softening labour market—support a shift towards a less restrictive monetary policy.
Fed Chair Jerome Powell stated that the regulator could reduce rates as early as September, provided the US economy follows the anticipated trajectory. This positions the central bank close to concluding its more than two-year fight against inflation.
"The trend for gold remains bullish, and prices should hit $2,500 this year as the Fed lowers interest rates," said Peter Fung, head of dealing at Wing Fung Precious Metals.
Meanwhile, the escalating threat of a broader conflict in the Middle East is enhancing the safe-haven appeal of gold. Early Wednesday, Hamas leader Ismail Haniyeh was assassinated in Tehran, following Israel's claim of killing Hezbollah's top commander in a Beirut airstrike on Tuesday.
Meanwhile, China's manufacturing activity, a major metals consumer, contracted in July for the first time in nine months.
XAU/USD faced resistance at the $2,450 level and corrected slightly during the Asian trading session. Today, traders should focus on the US ISM Manufacturing Purchasing Managers' Index report release at 2:00 p.m. UTC.
Higher-than-expected results will likely extend the bullish trend in XAU/USD. Conversely, weak figures may pause or even break it.
Euro Holds Steady on Mixed Data
On Tuesday, EUR/USD moved in the 1.08000–1.08400 range and rose by 0.11%. Meanwhile, the US Dollar Index (DXY) lost 0.42% following Federal Reserve (Fed) Chair Jerome Powell's speech.
In his speech, Jerome Powell stated that the regulator may consider interest rate reduction as early as September, provided that inflation decreases, economic growth remains reasonable, and the labour market remains stable.
However, he also emphasised that the US central bank continues to rely on data and hasn't yet made any specific decisions regarding future meetings. Adam Button, Chief Currency Analyst at ForexLive, stated that the Fed's approach is to wait for more data before making significant changes to its monetary policy.
Meanwhile, the annual inflation rate in the eurozone unexpectedly increased towards 2.6% in July, up from 2.5% in June, instead of the expected slowdown to 2.4%. Preliminary estimates show that the core rate, excluding food, energy, alcohol, and tobacco prices, remained steady at 2.9%.
The data may affect investors' expectations of a second rate cut this year by the European Central Bank (ECB) at its September meeting.
Given that the current inflation rate is above the ECB's target, the central bank faces pressure to make decisions that support economic stability while avoiding further inflation. Many consider the anticipated rate cut necessary to encourage borrowing and investment to help sustain the economic recovery in the eurozone.
EUR/USD continued to move within 1.08000–1.08400 during Asian and early European trading sessions. Today, the US Initial Jobless Claims data at 12:30 p.m. may add volatility to the market. If the figures are lower than expected, EUR/USD may move towards 1.08500. Otherwise, the pair may attempt to retest the 1.08000 support level.
GBP Faces Strong Volatility as the BOE Rate Decision Approaches
The British pound (GBP) gained 0.17% against the US dollar (USD) on Wednesday after the Federal Reserve (Fed) kept interest rates unchanged but signalled potential rate cuts in September.
Yesterday, Jerome Powell, the Fed Chair, hinted that an interest rate cut could happen as soon as September if inflation decreases as expected, the economy continues to grow steadily, and the job market remains stable.
However, he also noted that the US central bank will consider more economic data and has yet to determine its course of action for upcoming meetings.
"The Fed wants to let the data play out a little bit longer, even at the risk of falling behind the curve," said Adam Button, chief currency analyst at ForexLive.
Still, according to the CME FedWatch Tool, traders have fully priced in an interest rate cut by the Fed in September. Furthermore, there is now a 65% chance of another 25-basis-point rate cut in November.
As a result, the US Dollar Index (DXY) has been under bearish pressure lately, even as some macroeconomic data—pending home sales, job openings and consumer confidence—has been stronger than expected.
Meanwhile, Reuters calculates that options volatility in GBP pairs has risen to its highest level in almost a year, reflecting traders' cautiousness ahead of today's Bank of England's (BOE) interest rate decision.
Markets are pricing in a 55% chance of a rate cut. The high degree of uncertainty is unsurprising given that BOE officials have been silent for the past two months due to rules in the run-up to Britain's 4 July election. This means that whatever the decision the U.K. central bank makes, the reaction in GBP pairs will likely be rather strong.
GBP/USD was falling slightly during the Asian and early European trading session. The BOE will announce its rate decision at 11:00 a.m. UTC.
Traders should also keep an eye on the Monetary Policy Report, Monetary Policy Summary, and the official votes of the Monetary Policy Committee. The regulator may announce a so-called ‘hawkish cut’, meaning they will cut the rate now but project fewer rate reductions in the future.
In this case, GBP/USD may rally slightly. Conversely, if the BOE sounds explicitly dovish, the pair will likely drop towards 1.27800.