Gold Rose Despite More Hawkish Policy Announced by the Fed
On Wednesday, XAU/USD rose by 0.35%, reaching 2,340. Although the US Consumer Price Index (CPI) numbers weakened the US dollar (USD), the currency recovered after the Federal Reserve (Fed) announced only one rate cut in 2024.
Investors were eagerly awaiting information regarding interest rate cuts. Now, only one rate cut is expected instead of the two previously anticipated, despite the decline in inflation in May. The earlier inflation report gave false hope for a rate cut, and XAU/USD reversed and started to decline after the Fed meeting. In the short term, gold will likely continue to fluctuate until there is clarity on the interest rate path. The Fed has postponed the start of rate cuts to December. Despite unexpectedly soft inflation data and a larger-than-expected decline in headline and core figures, Fed officials revised the data with a hawkish perspective.
Gold has received support due to soft measures from major central banks, particularly the European Central Bank (ECB), which lowered rates at the last meeting. A similar move is expected from the Bank of England and the People's Bank of China. Reuters reports:
"China's consumer inflation held steady in May while producer price declines eased, but the underlying trend suggests Beijing would need to do more to prop up feeble domestic demand and an uneven economic recovery."
The market is recovering from yesterday's significant macroeconomic news and is expected to be relatively calm today. However, the US Producer Price Index and Jobless Claims reports will be released at 12:30 p.m. UTC, which could impact the market. If the data is weaker than expected, XAU/USD may rise towards 2,350 and above. Otherwise, the pair may decline towards the important support level of 2,290.
Euro Fluctuated Following US CPI Data and Fed Projections
The euro (EUR) rose by 1% following a weak US Consumer Price Index (CPI) report but corrected after US economic projections indicated only one 25-basis-point (bps) rate cut in 2024.
The softer inflation data surprised the market after Friday's unexpectedly strong nonfarm payroll (NFP) and average hourly earnings, which pushed yields and the US dollar (USD) higher. Markets have become extremely sensitive to any economic data, partly because the Federal Reserve (Fed) said it needs more evidence to be confident that inflation is moving toward its 2% target. 2-year Treasury yields fell to their lowest level in ten weeks after the inflation report, losing gains made following the NFP report, but then started to recover. The US Dollar Index (DXY) also declined by 0.6%.
However, EUR/USD lost some gains after the Fed Summary of Economic Projections indicated only one 25 bps rate cut in 2024 and raised the longer-run neutral rate towards 2.8% from 2.6% in March. Fed Chair Jerome Powell mentioned that the new SEP projections included May's CPI data, which some investors interpreted as slightly hawkish. EUR/USD retreated from its highs, but long positions remained steady as yields stayed lower and riskier assets retained most CPI-driven gains. The price action suggests investors may focus more on the data and think the Fed is reacting too slowly to the latest economic developments.
EUR/USD continued to correct during the Asian and early European trading sessions. Today, traders should pay attention to key US reports: the Producer Price Index and Jobless Claims report at 12:30 p.m. UTC. These updates will provide insights into the current state of the US labor market and inflation rate, potentially influencing investors' interest rate expectations and EUR/USD's exchange rate. If the data is better than expected, the chance of two rate cuts may decrease, causing EUR/USD to drop, possibly below 1.07800. Conversely, if the reports are weaker than expected, the pair may rise towards 1.08400 as chances for two rate cuts by the Fed increase.
CAD Traders Focus on US PPI and Jobless Claims Reports
The Canadian dollar (CAD) recovered its losses following the US Consumer Price Index (CPI) data but weakened again after the release of the Federal Open Market Committee (FOMC) economic projections.
The CPI figures were below the forecast but still not enough to meet the Federal Reserve's (Fed) goals. Yesterday, the FOMC kept its benchmark lending rate unchanged in the 5.25–5.50% range for the seventh consecutive time, aligning with market expectations. During the press conference, Fed Chair Jerome Powell stated that the restrictive monetary policy impacts inflation as the Fed had hoped. Still, the central bank will wait to see more substantial progress on inflation. According to their latest economic projections, policymakers expect only one rate cut this year, down from three anticipated in March.
Bank of Canada (BOC) Governor Tiff Macklem stated late Wednesday that there is a limit to how much the Canadian central bank can diverge on rates from the Fed, but they are not close to that limit. Last week, the BOC lowered its benchmark rate by 25 basis points (bps) towards 4.75%. Markets have priced in nearly 150 bps of rate cuts in the next few years. The divergence in interest rates between Canada and the US might boost the US dollar against the Canadian dollar and support USD/CAD in the near term.
USD/CAD rose during the Asian and early European trading sessions. Today, the key report is the US Producer Price Index (PPI) at 12:30 p.m. UTC, but the US Jobless Claims data may also affect the pair. These reports will help determine the future US interest rate path. If the PPI numbers are stronger than expected, USD/CAD may rise towards 1.37700. Conversely, the pair may sharply drop on lower-than-expected PPI figures.