Gold Rises by 1% on Weaker-Than-Expected US Data
Gold (XAU/USD) rose by 1% on Friday as the US macroeconomic data revealed weaker-than-expected figures.
The US Producer Price Index (PPI) for final demand remained flat in September, falling just below economists' expectations of a 0.1% rise, according to Reuters. This follows an unrevised 0.2% increase in August, signaling that inflation continues to ease, allowing the Federal Reserve (Fed) to pursue further interest rate cuts. The CME FedWatch Tool shows that markets are currently pricing in a more than 86% likelihood of a 25-basis-point rate (bps) cut by the Fed at the November meeting.
The yield on the benchmark 10-year US government bond remains steady above the 4% mark as the chances of aggressive policy easing by the Fed diminish. This supports the US dollar (USD), keeping it near a two-month high, and has led to renewed selling pressure on gold at the start of the week.
Meanwhile, government data released over the weekend showed China's headline consumer price index remained flat in September, with the annual rate at 0.4%, falling short of market expectations. This data, along with the lack of specific details on China's fiscal stimulus and rising geopolitical tensions in the Middle East, should support safe-haven assets such as gold.
XAU/USD rose during the Asian trading session. Today's trading session liquidity is expected to be low due to public holidays in several major economies. Japan is observing Sports Day, Canada is celebrating Thanksgiving, and the US is marking Columbus Day. These holidays result in reduced market participation, particularly from key financial centres, which can amplify price swings in markets with lower trading volumes. Traders should remain cautious, as unexpected moves are more likely in low-liquidity conditions.
"Spot gold is expected to test support at $2,635 per ounce, a break below which could open the way towards the $2,620 to $2,627 range", said Reuters analyst Wang Tao.
Euro Is in a Downward Trend as Fed Rate Cut Expectations Moderate
The euro (EUR/USD) was essentially unchanged compared to the US dollar (USD) on Friday as markets digested a series of macroeconomic reports that supported the Federal Reserve's (Fed) current approach to monetary policy.
EUR/USD has been in a clear downward trend since the end of September. Investors began to reassess the scope of interest rate cuts by the Fed following the release of better-than-expected US data and worse-than-expected eurozone reports. Specifically, US labour market reports painted a rather upbeat picture, while eurozone business activity data continued to disappoint. As a result, traders' views on the European Central Bank's (ECB) interest rates path turned more dovish, and divergence in monetary policy expectations between the ECB and the Fed turned more in favour of the US dollar.
"Higher inflation print has really backed the market away from being overly aggressive on how deep they were looking for the interest-rate cuts to go by the end of the year. So there was already an overprice in there, and that's basically unwound this week", said Amarjit Sahota, executive director at Klarity FX.
The latest US reports indicated that producer prices remained essentially unchanged in September while jobless claims rose sharply. However, the data failed to invigorate EUR/USD bulls as Hurricane Helene skewed weekly jobless claims data. At the same time, this week's data will be affected by Hurricane Milton, the second hurricane in two weeks to hit the southeast United States.
EUR/USD was falling during the Asian and early European trading sessions. Today, the macroeconomic calendar is relatively uneventful. Only remarks by a handful of Fed speakers may potentially move the market. FOMC Member Neel Kashkari is due to speak at 1:00 p.m. UTC, while FOMC Member Christopher Waller will deliver a speech at 7:00 p.m. UTC. Any hints at a more hawkish or less dovish monetary policy by the Fed will likely extend the bearish trend in EUR/USD.
British Pound Fluctuates Ahead of Labour and Inflation Reports
The British pound (GBP/USD) continued to move sideways on Friday, getting little support from data that showed Britain's economy returned to growth in August.
The Office for National Statistics (ONS) released data indicating that economic activity increased by 0.2% month-on-month in August, aligning with the expectations of economists surveyed by Reuters. This marks a return to growth after two consecutive months of stagnation, providing some relief for the finance minister, Rachel Reeves, ahead of the upcoming budget for the new Labour government later this month. The data confirmed that the U.K. economy has been slowing in the second half of 2024, which is expected given the strong growth observed in the first six months of the year. Lee Hardman, a senior FX strategist at MUFG, noted that while the data didn't change the overall outlook significantly, it provided confirmation of the current state of the U.K. economy.
This week is important for the Bank of England (BOE) as the latest inflation and labour market data are due. These data will be crucial for determining the bank's plans at the upcoming policy meeting in November. Through much of this year, GBP has benefited from expectations that the BOE would reduce interest rates more slowly than the Federal Reserve (Fed) and the European Central Bank (ECB). However, these expectations have shifted, and the recent decline in the GBP against the US dollar (USD) over the past month can be attributed to this change. Markets have lowered their expectations for further rate cuts by the Fed. The central bank governor, Andrew Bailey, said last week that the regulator may become more proactive if inflationary pressures persist.
The GBP/USD exchange rate fluctuated within a tight range during the Asian and early European trading hours. The pair is currently awaiting the release of two important economic reports: the U.K. Unemployment Rate tomorrow at 6:00 a.m. UTC and the Consumer Price Index on Wednesday. These data will provide valuable insights for the BOE before the November meeting.