Gold Rises as US Treasury Yields Decline
The gold (XAU) price rose on Tuesday, breaking a four-day losing streak as US Treasury yields declined. XAU/USD recovered yesterday, bolstered by a decline in US Treasury bond yields.
The US dollar (USD) experienced downward pressure amid a busy US news schedule, including crucial economic data releases. However, the greenback gained support from the so-called ‘Trump trade’, as the market sees policies under a potential second Donald Trump presidency as inflationary.
The former President continues to lead in the presidential race ahead of the November election. However, the Vice President of the Democratic Party, Kamala Harris, is gaining ground after starting her campaign in Milwaukee, Wisconsin.
On the monetary policy front, the Federal Reserve (Fed) is widely expected to begin cutting interest rates in September due to cooling inflation. Overall, the market anticipates two cuts by the US central bank before the end of the year.
According to a Reuters poll, the prices of precious metals have risen as market participants believe the easing of the US monetary policy will begin soon. The survey revealed that 73 out of 100 economists expect the Fed to cut the base rate by 50 basis points (bps) in 2024, 13 foresee a 25-bps cut, and only three predict no reductions.
Also, XAU/USD received a boost as India reduced import taxes on gold and silver, potentially increasing retail demand.
XAU/USD rose during the Asian trading session. Today, traders will focus on a series of S&P Global Purchasing Managers' Indices (PMI) reports from around the world. The US PMI will be released at 1:45 p.m. UTC.
If the figures are higher than expected, the chances of a rate cut by the Fed in September will decline, possibly bringing XAU/USD below $2,390.
Lower-than-expected PMI data will show that the US economy is slowing, so the rate cut will likely be warranted. In this case, the price of gold may rise towards $2,440.
"Spot gold may break resistance at $2,417 per ounce and bounce further to $2,432", said Reuters analyst Wang Tao.
The Euro Declines as the US Dollar Strengthens
EUR/USD lost 0.35% on Tuesday, while the US Dollar Index (DXY) broke above the 104.400 resistance level and rose by 0.18%.
US existing home sales numbers in June declined more than initially anticipated, supporting the market expectation of soon rate cuts by the Federal Reserve (Fed). Investors will likely now pay close attention to upcoming US economic data: Gross Domestic Product (GDP) for Q2, Unemployment Claims, and Durable Good Orders reports due this Thursday.
The key event of the week will be Friday's Personal Consumption Expenditure (PCE) Index report, the preferred measure of inflation used by the US central bank when planning its monetary policy.
According to most economists polled by Reuters, the Fed is likely to reduce interest rates in September and December due to a slowing inflation rate despite resilient US consumer demand.
Luke Browne, head of Asset Allocation for Asia at Manulife Investment Management, noted that while the US consumer demand is still strong, some indicators reveal signs of weakness. He anticipates two rate reductions by the US regulator but acknowledges a significant degree of uncertainty associated with this decision.
EUR/USD has been moving within the 1.08400–1.08550 range in the Asian and early European trading sessions. The US Manufacturing and Services Purchasing Managers' Index (PMI) preliminary data will come out at 1:45 p.m. UTC today.
A higher-than-expected number will put downward pressure on EUR/USD, while lower-than-anticipated figures might suggest a bullish outlook for the euro.
BOC Rate Decision and US PMI Data Will Define Canadian Dollar Trend
On Tuesday, the Canadian dollar (CAD) lost 0.22% against the US Dollar (USD) as traders continued to reposition ahead of the critical economic data releases. Fundamentally, USD/CAD has been in a clear bullish trend since 11 July.
The US Dollar Index (DXY) started to stabilise in the 104.000–103.500 area, while Canadian macroeconomic reports continued to come out weaker than expected.
Most recently, a disappointing real estate report and a sharp drop in retail sales prompted investors to increase their bets on an interest rate cut by the Bank of Canada (BOC) at today's monetary policy meeting at 1:45 p.m. UTC.
Like most other commodity currencies, AUD is under bearish pressure due to weak Chinese demand. Disappointing Chinese economic data and surprising interest rate reductions by the People's Bank of China have raised concerns about decreasing demand for raw materials.
Thus, prices of key commodities like iron ore and copper plunged to their lowest point in three months by Wednesday morning. USD/CAD continued to rise during the Asian session but fell again during the early European trading session.
Two important events today at 1:45 p.m. will likely outline the pair's trend in the medium term. Firstly, the BOC will announce its overnight rate decision and issue its latest monetary policy report.
The central bank is expected to cut interest rates from 4.75% to 4.50%. However, it is not guaranteed. The markets are currently pricing in an 84% chance of a 25-basis-point reduction. If the BOC keeps the rate unchanged, USD/CAD may plunge sharply below 1.37500.
Otherwise, USD/CAD will likely move sideways with a minor bullish tilt. Watching for any new details in the Monetary Policy Report will be important because dovish policy may come with hawkish statements. In this case, USD/CAD may still drop, but to a lesser extent.
An additional source of volatility for USD/CAD may be the US S&P Global Purchasing Managers' Index (PMI) report. The report will be released at 1:45 p.m. UTC and will impact all USD-related pairs.
Lower-than-expected figures may exert bearish pressure on USD/CAD, while higher-than-expected results may give the pair a bullish impulse.