Today's CPI Report May Break Gold's Bullish Trend.
The price of gold (XAU) soared towards a new peak of 2,365 on Tuesday, driven by its increased appeal as a safe-haven asset amid concerns over rising inflation.
The XAU/USD price has surged by 14% this year, significantly driven by purchases from central banks seeking safety amid high geopolitical tensions and buying from funds. Many factors, including some that are uncommon, currently drive the trend in gold.
According to ANZ commodity strategist Soni Kumari,
"Gold is diverging from its traditional key drivers. Due to geopolitical tension, central banks in emerging markets are stockpiling gold to diversify risk, some volatility in the Chinese currency and the emergence of inflation risk are also driving prices right now."
Thus, traders should adopt a complex approach and consider numerous data and factors to understand how XAU/USD will move in the current economic landscape.
Gold maintains its upward trajectory, fuelled by continuing central bank purchases as geopolitical unrest in Ukraine and the Middle East, along with inflation concerns, increase gold's safe-haven appeal. Moreover, retail demand from China supports the price of XAU/USD—the People's Bank of China notably increased its gold reserves to 72.75 million troy ounces in March. The Bank of America projects an impressive rise in gold's value, suggesting that the metal could reach up to 3,000 by 2025.
XAU/USD declined in the Asian trading session but has started to recover in the early European session. The pair may hold evelated as investors await the US Consumer Price Index (CPI) report for March today at 12:30 p.m. UTC. Lower-than-expected CPI figures could increase the chances of a rate cut by the Federal Reserve in June, potentially pushing XAU/USD higher. Conversely, unexpectedly high inflation might temporarily reverse the bullish trend in gold.
Euro May Correct Downwards in the Event of a Strong US CPI Report
Initially, the euro (EUR) rose above 1.08800 against the US dollar (USD) on Tuesday but lost all the gains in the American trading session, finishing the day essentially unchanged.
EUR/USD has been trading in an uptrend since 2 April, but the momentum has weakened following the release of a better-than-expected US Nonfarm Payroll (NFP) report last Friday. Fundamentally, the pressure on the pair remains bearish as the divergence in monetary policy expectations between the Federal Reserve (Fed) and the European Central Bank (ECB) continues to favor the US dollar over the euro.
According to interest rate swap market data, investors expect the ECB to deliver roughly 85 basis points (bps) worth of rate cuts and less than 70 bps by the Fed in 2024. Indeed, if the US macroeconomic data continue to outperform expectations, the probability of a rate cut by the Fed in June will decline further, exerting more downward pressure on EUR/USD. Meanwhile, traders are almost 100% certain that the ECB will execute its first rate cut in June. The only thing lacking is a green light from the regulator, which will issue its latest monetary policy statement on Thursday.
EUR/USD declined slightly during the Asian and early European trading sessions. Today, traders may experience increased volatility in all USD pairs as the US will release its key inflation report at 12:30 p.m. UTC. The US Consumer Price Index (CPI) has been rising in recent months, but the market has been left guessing whether this marks a new trend or merely an outlier in a downward trajectory. Today's CPI figures will certainly provide more clues on the state of the US economy. If CPI figures are lower than expected, the market will have to price in a higher probability of an interest rate cut by the Fed in June, likely leading to an upward correction in EUR/USD. However, EUR/USD will almost certainly plunge if consumer prices rise faster than anticipated. Key levels to watch are 1.08900 and 1.08010.
The CAD May Face Increased Volatility Due to 2 Important Events
The Canadian dollar (CAD) was essentially unchanged on Tuesday as traders remained cautious ahead of US inflation data.
The long-term bullish trend in USD/CAD, which began in December 2023, remains intact. Indeed, the upward trend has strengthened recently due to upbeat US macroeconomic statistics. Nonetheless, USD/CAD gains seem to be capped by the strong 1.36500 resistance area. Furthermore, the robust rally in crude oil prices supports the Canadian dollar. Fundamentally, the pressure on USD/CAD remains bullish as the divergence in monetary policy expectations between the Federal Reserve (Fed) and the Bank of Canada (BOC) continues to favor the USD over the CAD. According to interest rate swap market data, investors expect the BOC to deliver roughly 74 basis points (bps) worth of rate cuts, while the Fed is anticipated to cut interest rates by less than 70 bps in 2024.
USD/CAD was declining slightly during the Asian and early European trading sessions. Today, USD/CAD will face extra volatility as 2 important events are set to unfold: the US will release the inflation report at 12:30 p.m. UTC, and the BOC interest rate decision is scheduled for 1:45 p.m. UTC. Economists expect the headline US Consumer Price Index (CPI) to rise by 0.3% month-on-month, compared to a 0.4% rise in February. If the figures are lower than expected, the market may be more inclined to anticipate a rate cut by the Fed in June, leading to a downward correction in USD/CAD. Otherwise, USD/CAD is likely to rally above the critical 1.36000 mark.
Also, the BOC will announce its interest rate decision after the US CPI release. According to Reuters, the regulator is expected to leave its benchmark rate unchanged at a 22-year high of 5%, hinting at forthcoming rate cuts in June.
"Even if the Bank of Canada doesn't cut rates today, the market seems to be positioned for either a dovish comment or further weakness in the Canadian dollar," said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.
Indeed, the tone of the policy statement might provide clues about the BOC interest rate outlook. Key levels in USD/CAD to watch are 1.36000 and 1.35400.