The Gold Price Sets a Record High on Dovish Fed Statements
The gold (XAU) price surged by 1.33% on Wednesday after the Federal Reserve (Fed) maintained its previous projection of 3 rate cuts in 2024.
As expected, the Fed kept its benchmark interest rate unchanged in the 5.25–5.50% range. However, the monetary policy statement and the FOMC Economic Projections report indicated that central bank officials continue to believe that inflation will subside, giving the opportunity to deliver 3 rate cuts in 2024. 9 of 19 FOMC members see the US policy rate above 4.6% median forecast for 2024, and only 1 member projected 4 rate cuts in 2024. The market considered the report as dovish and bullish for gold, pushing the probability of a 25-basis-point (bps) rate cut in June towards 71%, a significant increase from just over 50% before the data release.
"With Powell keeping 3 potential rate cuts in play this year, bond yields and the USD dipped, which opened a pathway higher for the gold price," said Tim Waterer, the chief market analyst at KCM Trade.
XAU/USD jumped higher in the Asian trading session but lost some gains in the early European trading hours. The gold is now trading near all-time highs again, and the risk of a downward correction increases. Any macroeconomic report suggesting that the US economy remains resilient and price pressure stays elevated could trigger a major sell-off in XAU/USD, as dovish interest rate expectations have been overly priced in. Thus, traders should focus on the release of a series of Manufacturing and Services Purchasing Managers' Indices (PMIs) today. The US PMIs will be published at 1:45 p.m. UTC. Higher-than-expected figures will have a bearish impact on XAU/USD, decreasing chances for soon rate cuts. Conversely, lower-than-expected numbers may push XAU/USD slightly higher.
"Spot gold may retest resistance at $2,222 per ounce, a break above which could lead to a gain into the $2,228–$2,234 range," said Reuters analyst Wang Tao.
The Euro Rises on the US Dollar's Weakness
The euro (EUR) gained 0.49% on Wednesday as the US dollar declined due to the dovish monetary policy outlook released by the Federal Reserve (Fed).
The Fed confirmed its previous outlook for 3 interest rate cuts this year in yesterday's highly anticipated policy statement. Furthermore, Fed Chairman Jerome Powell said in the press conference that the central bank's policy rate has now peaked, suggesting that the next move can only be a rate cut. However, he didn't explicitly mention when exactly the rate cut would come. The market assumes the first rate reduction will arrive in June, considering a 71% probability of a 25-basis-point (bps) rate cut. Similarly, investors expect the European Central Bank (ECB) to deliver the first rate cut around the same time. Fundamentally, there is little difference between the Fed and the ECB regarding their monetary policy outlooks. Thus, EUR/USD may continue to move sideways in the medium term within a broad 1.07000–1.10000 range.
EUR/USD was rising slightly during the Asian and early European trading sessions because investors' interest rate expectations for both the US and the eurozone are essentially the same. Thus, only the upcoming data may shift the balance. Today, traders should focus on the series of Manufacturing and Services Purchasing Managers' Indices (PMIs). The eurozone PMI will be published at 9:00 a.m. UTC, and the US PMI is due at 1:45 p.m. UTC. Strong figures above 50 typically indicate that the economy is expanding, while numbers below 50 suggest that the economy may be contracting. If the eurozone PMI figures are higher than expected or higher than the US PMI numbers, EUR/USD will likely rise above 1.09500. However, lower-than-expected results will put downward pressure on the pair.
GBP/USD Remains Within a Bullish Trend Even as UK Inflation Slows
The British pound (GBP) surged 0.5% on Wednesday as dovish Federal Reserve (Fed) interest rate projections overshadowed the decline in U.K. inflation figures.
Yesterday was very eventful for GBP traders as the U.K. released many important macroeconomic reports, while the Fed announced its interest rate decision and published the latest FOMC Economic Projections. The U.K. data showed that British inflation slowed in February, keeping high chances that the Bank of England (BOE) will start cutting interest rates in the upcoming months. 'Inflation numbers do not change our view that the MPC is likely to convey the message that it has an eye on easing policy rates this year, but the hurdle to do so has not yet been overcome,' said Ellie Henderson, an economist with Investec.
Investors slightly increased bets that the BOE will begin to cut interest rates in August, which should have put bearish pressure on the British pound. However, the dovish message from the Fed officials sent the US dollar lower and pushed GBP/USD higher. Investors now expect the US central bank to begin the rate-cutting cycle in June and deliver around 80 basis points (bps) worth of rate cuts in 2024 compared to the expected 65 bps of rate reductions by the BOE. Thus, the fundamental pressure on GBP/USD remains bullish for now.
GBP/USD was rising during the Asian and early European trading sessions. Today will be another eventful day for GBP traders due to the U.K. Manufacturing and Services Purchasing Managers' Index (PMI) at 9:30 a.m. UTC and the BOE rate decision at 12:00 p.m. UTC. Arguably, the BOE's decision, its monetary policy statement, and members' voting results should have a bigger impact on the British pound. Therefore, the PMI is unlikely to produce a noticeable reaction in the market as traders will be waiting for the central bank's statement. Traders should monitor any shift in the BOE's Monetary Policy Committee (MPC) rate voting. Previously, 2 MPC members voted for a rate hike and 1 for a rate cut. GBP will likely decline if the number of doves within the MPC increases.