Gold (XAU/USD) hovered near record highs on Monday despite higher-than-expected US Composite Purchasing Managers' Index (PMI) figures.
The S&P Global Flash US Composite PMI dipped from 54.6 in August towards 54.4 in September, slightly beating expectations of 54.3. The data showed strong service sector growth while manufacturing activity contracted deeper. Meanwhile, business expectations hit a near two-year low, reflecting uncertainty ahead of the Presidential Election, leading companies to slow hiring for the second month. However, prices for goods and services also rose faster since March, with input costs up the most in a year.
The Federal Reserve's (Fed) recent rate cut enhanced gold's appeal, and expectations of another 50-basis-point (bps) reduction by the year's end further support the non-yielding metal. Rising tensions in the Middle East, including Israeli strikes on Lebanon, also reinforced gold's safe-haven status.
Overall, Atlanta Fed President Raphael Bostic noted faster-than-expected progress on inflation and labour market cooling, signalling possible policy normalisation sooner. Traders now await the Personal Consumption Expenditures (PCE) Price Index report and upcoming Fed officials' speeches for more clues on the interest rate trajectory. Higher-than-expected PCE numbers or hawkish remarks from Fed members may support the greenback and put bearish pressure on XAU/USD.
XAU/USD rose during the Asian trading hours. The US Consumer Confidence report will be released today at 2:00 p.m. UTC. Stronger-than-expected figures, indicating an increase in consumer spending, could reduce the likelihood of a larger Fed rate cut and put downward pressure on XAU/USD. Conversely, weaker-than-expected figures may push the pair higher
"Spot gold may test support at $2,619 per ounce, a break below which could open the way towards $2,606 to $2,611 range", said Reuters analyst Wang Tao.
Euro Declines Amid Eurozone Economic Downturn
The euro (EUR/USD) lost 0.45% against the US dollar (USD) on Monday after eurozone Purchasing Managers' Indices (PMIs) figures were much lower than expected.
Preliminary data from the S&P Global showed the eurozone economy experienced a significant and unexpected contraction in September. The region's largest services sector remained stagnant while manufacturing declined even further. This downturn was widespread, affecting major economies like Germany and France. As a result, expectations for more interest rate reductions by the European Central Bank (ECB) increased, and the euro's value dropped sharply.
"As the Olympic flame was extinguished, so was eurozone optimism. The August uptick in the PMI was met by a sharp decline in September. This further fuels growth concerns in the bloc as inflation worries fade", said Bert Colijn, an economist at ING.
Interest rate swaps market data currently implies a 92% probability of a 25-basis-point (bps) reduction by the ECB on the 19 October meeting.
Meanwhile, US PMI data showed a less bleak picture but still concerning. The US business activity remained relatively stable in September, but prices increased at the fastest rate in half a year, suggesting that inflation may rise in the future. ‘The early survey indicators for September point to an economy that continues to grow at a solid pace. Meanwhile, a reacceleration of inflation is also signalled, suggesting the Federal Reserve can't totally shift its focus away from its inflation target as it seeks to sustain the economic upturn’, said Chris Williamson, chief business economist at S&P Global Market Intelligence.
EUR/USD rose slightly during the Asian and early European trading sessions, but the short-term trend remains bearish. Today, the main focus is on the US CB Consumer Confidence report due at 2:00 p.m. UTC. Higher-than-expected results may provoke another sharp downward correction in EUR/USD and push the pair below the critical 25-day moving average. Conversely, weaker-than-expected figures may temporarily pull EUR/USD above the 1.11400 level.
British Pound Hits a Two-Year High
The British pound (GBP/USD) rose by 0.19% on Monday and renewed a 2022 high despite bleak U.K. S&P Global Composite Purchasing Managers' Index (PMI) data.
According to a survey released on Monday, British businesses reported a slowing of growth this month. The preliminary estimate for the U.K. S&P Global Composite PMI fell towards 52.9 in September, lower than economists' forecasts of 53.5 but still above the 50 threshold that separates expansion from contraction. Lower-than-expected data could lead the Bank of England (BOE) to consider reducing rates again.
The U.K. regulator has reduced interest rates only once so far. Last week, the central bank maintained the base rate at 5%, indicating that it will be cautious about future reductions. Signs of economic stability and persistent prices in the service sector have contributed to expectations that the BOE may not be as aggressive in monetary easing as other major central banks.
"Over the past two years, none of the G10 economies has seen their data exceed expectations as much as the U.K., and in combination with high real interest rates, the currency remains at a favourable level", said FX strategists at Deutsche Bank in a report.
The British Finance Minister Rachel Reeves said there will not be more austerity or big cuts in the budget. She said the economy will still grow in the future, even though there were worries about the budget before.
GBP/USD has been growing during Asian and early European trading hours. The pair broke above the 1.33600 resistance level. No major events are expected to influence the pair today, so GBP/USD may continue to move within the established trend.