Gold Declines as Chances of a June Rate Cut by the Fed Decrease
The gold (XAU) price dropped by 0.25% on Friday, recording its first weekly decline in 3 weeks as U.S. inflation data disappointed the investors.
Although Friday's U.S. economic data—Empire State Manufacturing Index and preliminary Consumer Sentiment—was lower than expected, supporting lower interest rates, investors focused on the inflation reports released earlier in the week. The Consumer Price Index (CPI) and the Producer Price Index (PPI) figures were higher than expected. High inflation may force the Federal Reserve (Fed) to keep interest rates elevated for an extended period, putting downward pressure on the prices of non-yielding assets, such as gold.
"Gold has already priced in whatever positive boost it would get from expectations that interest rates are going down if inflation starts to kick higher again, it means that policymakers are going to have to keep monetary policy more restrictive for longer," said Everett Millman, the chief market analyst at Gainesville Coins.
Still, according to the CME FedWatch Tool, traders continue to await the interest rate cut in June, even as the chances of this scenario have dropped to 55%, compared to 72% before the CPI data release.
XAU/USD was falling during the Asian and early European trading sessions. Today, the economic calendar is relatively uneventful, so the established short-term bearish trend in gold may persist. Fundamentally, gold investors may reposition ahead of 5 central banks' interest rate decisions this week. Specifically, the Fed will announce its decision and issue the latest economic projections on Wednesday. Until then, XAU/USD's trend may lack clear direction.
"Spot gold may fall into a range of $2,126–$2,131 per ounce, as suggested by its wave pattern and a bearish Pennant," said Reuters analyst Wang Tao. However, analysts remain bullish on gold in the long term.
"We increase our average gold price forecast for 2024 from $2,090 to $2,180, targeting a move to $2,300 by year-end," Goldman Sachs wrote in a note.
The Upcoming Fed Meeting Will Define the EUR/USD Trend
Initially, EUR/USD briefly dropped below the important 1.08800 level on Friday but then recovered and finished the day essentially unchanged.
The U.S. Consumer Sentiment Index published by the University of Michigan decreased slightly to 76.5 in March, marking a 3-month low from February's 76.9 and being lower than expected. While there were slight improvements in personal finances, these were balanced by expectations of worsening business conditions. Consumers showed uncertainty about the economy's direction, especially with upcoming elections. The expectations index dropped slightly, but overall views on current conditions remained unchanged: investors anticipate the Federal Reserve (Fed) will begin cutting interest rates in June if inflation continues to ease as per forecasts, maintaining their projection of 3 rate cuts.
The European Central Bank (ECB) maintained high borrowing costs at the policy meeting on 7 March but noted substantial progress in reducing inflation, initiating talks on the possibility of easing monetary policy.
"If our macroeconomic forecasts are met in the coming months, it is normal that we will start cutting rates soon, and June could be a good date to start," said De Cos, the ECB policymaker, to El Periodico.
When asked about the possibility of 3 rate cuts of 25 basis points this year, De Cos avoided giving a specific timeline. Still, he noted that the current market conditions align with the ECB's goal to achieve a 2% inflation rate in the medium term.
EUR/USD was moving sideways during the early hours of a Monday trading session. Today, traders should focus on the release of the final data for the eurozone Consumer Price Index (CPI) at 10:00 a.m. UTC. The report may trigger slight volatility, as the market has already adjusted its position after preliminary data publication. Everyone now awaits the Fed rate decision and FOMC economic projections on Wednesday. This event will clarify the future of U.S. monetary policy and impact EUR/USD. Until then, EUR/USD will likely move sideways.
AUD/USD Stabilises Above 0.65500 Ahead of the RBA Decision
The Australian dollar (AUD) lost 0.30% on Friday as the US dollar continued to rise despite a weaker-than-expected Consumer Sentiment report and lower-than-expected Empire State Manufacturing Index figures.
The bullish trend in AUD/USD persisting since mid-February may now reverse as higher-than-expected U.S. inflation figures lowered the probability of interest rate cuts by the Federal Reserve (Fed), pushing the U.S. dollar higher. However, only a confident break below 0.65200 will trigger a new bearish trend in AUD/USD, and bears need a strong fundamental impetus to break the level.
This week's policy rate decisions from the Reserve Bank of Australia (RBA) and the Fed will determine the AUD/USD's trend. The RBA will announce its rate decision on 19 March at 3:30 a.m. UTC. At the last meeting, the Australian central bank held its cash rate unchanged at 4.35% and will likely do so on Tuesday. However, inflation remains above the target, recently accelerating from 3.4% in December to 3.6% in January. Moreover, in the previous meeting, the RBA suggested the possibility of a rate hike as the growth in consumer prices slows not as fast as expected. Now, investors are pricing in roughly 37 basis points (bps) worth of rate cuts by RBA in 2024, with the first rate cut anticipated in August.
The Fed's decision is due on Wednesday, and it will likely overshadow the RBA's meeting and may have a strong impact on AUD/USD. If the Fed delivers hawkish interest rate projections, investors will have to scale back their expectations for an early rate cut. Thus, the probability of a 25-bps rate reduction in June may decrease. In this case, AUD/USD will almost certainly decline, and a new bearish trend in the pair may start.
AUD/USD was essentially flat during the Asian and early European trading sessions. Traders will focus on the RBA rate decision at 03:00 a.m. UTC on 19 March. If the RBA delivers a hawkish message, AUD/USD will almost certainly rally—possibly above 0.66400. However, if the RBA expresses readiness to cut the rates in summer, AUD/USD may decrease or stabilize in the range of 0.65200–0.66000.