Gold Rises as Middle East Conflict Escalates
The gold (XAU) price rose more than 1% on Tuesday amid fears of escalating conflict in the Middle East. Middle East conflict continues to escalate.
Hamas leader Ismail Haniyeh was reported to have been assassinated in Tehran by Iran's paramilitary Revolutionary Guard. This incident followed Israel's claim of killing Hezbollah's top commander in a Beirut airstrike on Tuesday in response to an attack on the Israel-controlled Golan Heights over the weekend. All these factors supported XAU/USD.
Yesterday's US data revealed that job openings remained relatively stable at 8.2 million in June, slightly exceeding the forecast of 8 million.
Investors are now focusing on additional labor market data that will be released later this week, including the highly anticipated monthly jobs reports. Meanwhile, US consumer sentiment slightly improved in July, rising from 97.8 to 100.3 in June.
Commenting on the results, Dana M. Peterson, Chief Economist at The Conference Board, stated that:
"Confidence increased in July, but not enough to break free of the narrow range that has prevailed over the past two years." She added, "Even though consumers remain relatively positive about the labor market, they still appear to be concerned about elevated prices and interest rates, and uncertain about the future; things that may not improve until next year".
XAU/USD continued to rise during the Asian and early European trading sessions. Today, the main event is the Fed's interest rate decision, due at 6:00 p.m. UTC. Central bank policy rate decisions may have a substantial influence on the Forex market.
Although the market doesn't expect the US regulator to change its base rate, it may provide important updates in its monetary policy statement.
Additionally, Fed Chair Jerome Powell could offer further forward guidance during the press conference scheduled for 6:30 p.m. UTC. If he sounds more hawkish than previously, XAU/USD may start falling towards $2,350 again. Alternatively, a dovish statement may push the pair towards $2,480.
Euro Moves Sideways, Awaiting the Fed Rate Decision
On Tuesday, EUR/USD gained 0.09%, while the US Dollar Index (DXY) reached 104.800 and then started to decline despite better-than-expected US economic reports.
The number of job vacancies in the US remained relatively stable at 8.184 million in June 2024, compared to an upwardly revised figure of 8.23 million in May, slightly above the forecast of 8 million.
The US Consumer Confidence Index (CCI) increased towards 100.3 in June, slightly above the expected 99.7. Meanwhile, the eurozone Gross Domestic Product (GDP) grew by 0.30% in Q2. However, the outlook for the rest of the year is not as positive.
Another report showed that the German economy contracted unexpectedly by 0.1% in Q2 instead of the expected increase. Meanwhile, annual inflation in Germany increased unexpectedly towards 2.3% in July. It rose by 0.3% compared to the previous month—the highest in three months.
Traders will be closely monitoring today's interest rate decision by the Federal Reserve (Fed), which is expected to be the next major catalyst for the Forex market after the Bank of Japan (BOJ). Markets anticipate that the Fed will begin its easing cycle in September, with approximately 68 basis points of cuts priced in by the end of the year.
The expectation of imminent Fed rate cuts has halted the recent advance of the US dollar (USD), following decades-high US interest rates that have bolstered its appeal for most of the past two years.
"We expect the Fed to open the door for a first interest rate reduction in September," said Julien Lafargue, Chief Market Strategist at Barclays Private Bank.
"In our view, such an action today could send a wrong signal to markets and spook investors. However, with markets already pricing in slightly more than 25 basis points of cuts for September, the Fed may face difficulty in reversing these expectations," he added.
EUR/USD continues to move in a range of 1.08000–1.08350 during Asian and early European trading sessions. In addition to the Fed's interest rate decision today at 6:00 p.m. UTC, the market will be awaiting the eurozone's inflation data at 9:00 a.m. UTC. A higher-than-expected reading may invigorate EUR bulls, while a lower-than-expected reading may put bearish pressure on the currency.
Yen Continues to Fall as the BOJ Raises Its Key Interest Rate
The Japanese yen (JPY) gained 0.82% against the US dollar (USD) on Tuesday amid rising speculation that the Bank of Japan (BOJ) will continue to normalise its monetary policy and possibly raise its interest rate.
USD/JPY has declined by more than 5% since mid-July as traders turned more confident that the Federal Reserve (Fed) will begin cutting interest rates in September. Meanwhile, the market expects the BOJ to continue tightening its monetary policy.
Earlier today, the Japanese central bank increased its short-term interest rate to 0.25% and said it will gradually reduce its bond purchases. The amount of monthly bought bonds will fall to $19.65 billion, half the current target, by early 2026.
The fundamental and technical trend in USD/JPY seems to be turning decidedly bearish as the Fed and the BOJ are now expected to pursue divergent policies.
The latest interest rates swap market data implies roughly 70 basis points (bps) worth of rate cuts by the Fed and just about 10 bps worth of rate hikes by the BoJ by the end of the year.
"Despite sluggish consumer spending, rising wages are offering room for optimism that growth will recover in the coming quarters. Rising inflation expectations also open the path for ongoing monetary policy normalisation by the BOJ. Barring major disruptions, the BOJ is on course to tighten further, with another interest hike by the start of next year," said Fred Neumann, Chief Asia economist at HSBC in Hong Kong.
The market has been preparing for a rate hike by the BOJ for more than two weeks, so the immediate reaction in USD/JPY was relatively muted.
The next big support level is in the 150.00 area, but breaking above it requires an additional fundament impetus, which may come if US data continues to be weaker than expected.
Today, traders should focus on the Fed interest rate decision at 6:00 p.m. UTC. Specifically, investors will be looking for new details in the FOMC statement and any clues on the future path of interest rates during the press conference at 6:30 p.m. UTC.
If Jerome Powell confirms that the Fed is prepared to deliver a rate cut, USD/JPY may continue to decline in the mid-term.