Gold Remains at a 3-Week High
Gold (XAU) fell by 0.18% on Friday following higher-than-expected US Producer Price Index (PPI) figures.
XAU/USD remained steady near a seven-week high on Friday as the US dollar (USD) and Treasury yields weakened despite a report showing that US producer prices rose more than expected last month.
The data didn't bolster the greenback, which had declined on Thursday following the Consumer Price Index (CPI) data, demonstrating a decreasing inflation rate.
Treasury yields also continued to decline, giving gold a bullish impulse.
The US 2-year note reached 4.4%, down by 4.6 basis points towards the lowest since 8 March, while the yield on the 10-year note decreased by 2.4 basis points towards 4.1%.
The gold price rose for the third consecutive week as cooling US inflation strengthened expectations for interest rate cuts by the Federal Reserve (Fed). Last week's data revealed that US consumer prices dropped in June for the first time in four years, solidifying projections of a US rate reduction in September. However, the data also indicated softer physical gold demand in Asia due to elevated prices, which raised market caution.
Shock over the assassination attempt on former US President Donald Trump affected financial markets this Monday. Traders have initially reacted by buying the US dollar and selling long-term US Treasuries, dubbed the 'Trump-victory trades', as the incident appears to boost his chances of winning the presidential elections.
Treasury yields tend to rise when the possibility of a Trump victory increases, partly due to the expectation that his economic policy will increase inflation and debt. Fed Chair Jerome Powell will give a speech today at 4:30 p.m. UTC, which may affect expectations for a rate cut in September.
"Spot gold may retest resistance at $2,461 per ounce, a break above which could open the way towards $2,426–$2,438 range", said Reuters analyst Wang Tao.
EUR/USD Slips After an Assault on Donald Trump
EUR/USD rose by 0.35% on Friday, reaching the resistance level of 1.09000 and closing the trading day slightly above it, following the release of US Producer Price Index (PPI) data.
US producer prices rose by 2.6% year-over-year in June 2024, marking the highest increase since March 2023. The PPI numbers accelerated from the previously reported 2.4% in May, which was also higher than the forecast of 2.3%. Producer prices increased by 0.2% monthly, significantly exceeding estimates of 0.1%. Still, the euro recovered from the initial correction that started after the report was released and reached 1.09100.
Based on the Fed funds futures data from the CME Group (NASDAQ:CME), there is a 92.4% probability that the Federal Reserve (Fed) will ease monetary policy at its September meeting. Economists also anticipate a soon rate reduction from the US Central Bank. However, the market's uncertainty around inflation has increased. If inflation spikes unexpectedly, it could significantly impact asset prices and the outlook for the euro.
The shock over the assassination attempt of former US President Donald Trump has been driving markets this Monday. Traders' initial reaction has been to purchase the US dollar and Bitcoin and sell longer-term US Treasuries, leading to a 10-year Treasury bond price decline.
The sell-off happened due to the expectation that Donald Trump's economic policies could accelerate inflation and increase debt levels.
Today, the President of the European Central Bank (ECB), Christine Lagarde, will give a speech. However, this week's most important event is the upcoming ECB decision on interest rates. The decision is unlikely to surprise the markets, as there is a 95% probability that the interest rate will stay at 3.75%. Thus, more economic data will be crucial in determining the timing of the next interest rate reduction.
On Monday, EUR/USD gapped downwards at 1.00870 and has been trading within a range of 1.08850 to 1.08950 throughout the Asian and early European trading sessions.
Today, Christine Lagarde will give a speech in Brussels that may affect the euro's exchange rate. Traders should also pay attention to the US Empire State Manufacturing Index at 12:30 p.m. UTC and the speech given by Fed Chairman Jerome Powell at 4:00 p.m. UTC.
USD/JPY Plummets Amid Increasing Chances of a Fed Rate Cut
The Japanese yen (JPY) gained 0.58% on Friday as a weaker-than-expected US Consumer Price Index (CPI) report on Thursday continued to exert downward pressure on the US dollar (USD).
Even though Friday's Producer Price Index (PPI) data came out higher than expected, it didn't change the market expectation of interest rate cuts by the Federal Reserve (Fed). Thus, the US Dollar Index (DXY) continued to fall. Currently, the market is pricing in a 92% probability that the Fed will ease its monetary policy in September. Meanwhile, interest rate swaps market data show more than 60 basis points (bps) worth of rate cuts by the Fed and almost 20 bps worth of rate hikes by the Bank of Japan (BOJ) by the end of 2024. The divergence in monetary policy expectations between the two central banks has narrowed following the release of lower-than-expected US inflation figures. As a result, USD/JPY has dropped to almost a one-month low in just two trading sessions.
At the same time, traders are on alert for any indications of further intervention in the foreign exchange market by Japanese authorities. Speculation grew that the BOJ may have intervened on Thursday. According to Reuters, the BOJ's daily operations report on Friday suggested the government may have spent between $21 and $22 billion to strengthen the national currency.
"If they intervened (on Thursday), it makes it likely that they intervened (on Friday). And I think it's a good strategy to keep the market off balance", said Steve Englander, head of global G10 FX research and North American macro strategy at Standard Chartered Bank.
USD/JPY briefly moved higher during the Asian trading session as safe-haven flows into the US dollar sharply increased following a failed assassination attempt on former US president Donald Trump.
However, the pair restarted to decline during the early European trading hours. Some political analysts now believe that Trump may win the election by a landslide, which will remove the uncertainty and strengthen the US dollar in the long term.
Today, traders should watch the Empire State Manufacturing Index report at 12:30 p.m. UTC and Jerome Powell's speech at 4:00 p.m. UTC. Both events might spur some volatility in USD pairs. However, they are unlikely to change the medium-term bearish trend in USD/JPY significantly.