Gold Drops to a 1-Week Low as a Stronger US Dollar Weighs Down on Metals
The gold (XAU) price dropped by 0.68% as the US dollar and Treasury yields continued to rise due to solid macroeconomic reports and hawkish comments from Federal Reserve (Fed) officials.
After the US published strong employment figures on Friday, the chances of an interest rate cut in March declined, and the short-term bullish trend in XAU/USD essentially ended. Gold continued to weaken on Monday as the probability of the rate reduction further decreased following the release of the better-than-expected ISM Non-Manufacturing Purchasing Managers' Index (PMI). Furthermore, Neel Kashkari, the President of the Minneapolis Fed, said a resilient US economy means the central bank can take time before deciding to cut interest rates. Overall, investors continue to lose faith that the Fed will ease its monetary policy soon. However, Jim Wyckoff, a senior analyst at Kitco Metals, believes that 'gold should hold above the $2,000 level due to geopolitical uncertainties in the market that could quickly prompt some safe-haven demand.'
XAU/USD stabilized in the Asian session and attempted to recover during the early European session. Today, the macroeconomic calendar has no major data releases, so volatility may decline and established short-term trends may continue. Still, investors should focus on changes in the tone of Fed speakers today for any clues on the timing of rate cuts. Loretta J. Mester, the President of the Cleveland Fed, will give a speech at 5:00 p.m. UTC, and the speech of Susan Collins, the President of the Boston Fed, is scheduled at 7:00 p.m. UTC. Technically, XAU/USD will probably remain under bearish pressure if its price remains below the important 2,035 level. 'Spot gold may retest resistance at $2,029 per ounce, as a 5-wave cycle from $2,065.19 has completed, said Reuters analyst Wang Tao.
EUR/USD Hits a 2-Month Low Due to Strong US Reports
The euro (EUR) declined by 0.40% as the US Dollar Index rose after a better-than-expected US ISM Services Purchasing Managers' Index (PMI) report.
On Monday, the US dollar soared to a nearly 3-month high as market participants decreased their expectations of substantial rate cuts by the Federal Reserve (Fed) this year due to recent upbeat economic data. The growth of the US services sector accelerated in January, driven by a rise in new orders and a recovery in employment, according to the Institute for Supply Management (ISM). The data indicates that the economic momentum from Q4 has carried over into 2024. 'The question is, who can keep up with the US in terms of the rates adjustment?' asked Steven Englander, a head of global G10 FX research at Standard Chartered Bank. 'The market's answer so far is not too many central banks and not too many of their currencies,' he added. US Treasury yields began to increase early Monday, following comments by Fed Chair Jerome Powell, who suggested that the US central bank might 'give it some time' before opting for rate cuts. The yields climbed even higher after the release of the ISM survey results.
The eurozone exhibited subtle recovery signs at the year's start: the ISM survey highlighted escalating inflation pressures, supporting the European Central Bank's (ECB) decision to maintain high-interest rates. HCOB's composite PMI slightly improved in January but still indicated economic contraction. Overall, the fundamental pressure on EUR/USD remains bearish as the market expects more rate cuts from the ECB than from the Fed. According to the latest interest rate swap market data, traders are currently pricing in almost 130 basis points (bps) worth of rate cuts by the ECB and less than 120 bps by the Fed in 2024.
Today, EUR/USD rose slightly in the Asian and early European trading sessions. Traders await the eurozone Retail Sales report at 10:00 a.m. UTC. Higher-than-expected figures may strengthen the euro. However, lower than the forecast numbers will put downward pressure on EUR/USD.
GBP/USD Drops to a 6-Week Low as a Rate Cut By the Fed Seems Less Likely
The British pound (GBP) lost 0.78% on Monday as expectations that the Federal Reserve (Fed) won't cut the rates aggressively this year pushed the US Dollar Index towards a 3-month high.
Data on Monday showed that the US services sector grew in January as new orders increased and employment rebounded. Solid US economic data has disappointed traders who hoped for early and steep interest rate cuts by the Fed. At the same time, Jerome Powell, the Fed Chair, and other policymakers have also highlighted the risk of premature rate cuts. As a result, investors price in only a 17% chance of the rate cut in March, compared to a 69% chance at the beginning of the year. Also, the Fed is now expecting only 120 basis points (bps) worth of cuts this year, compared to around 150 bps anticipated in early January. 'There may still be a bit of room to scale back (more), but it's likely limited given that the disinflation trend in the US is becoming more entrenched and that labor market tightness is gradually easing,' said Christopher Wong, a currency strategist at OCBC in Singapore.
Meanwhile, the Bank of England's (BOE) sentiment is slowly turning dovish. Huw Pill, the BOE Chief Economist, said yesterday that the question for policymakers was 'not if but when it would be appropriate to begin to cut interest rates.' The market currently expects the central bank to start decreasing the base rate in June and is pricing in roughly 80 basis points (bps) worth of rate cuts this year.
GBP/USD was rising slightly during the Asian and early European trading sessions. The macroeconomic calendar is uneventful today, so volatility may decline and established short-term trends may continue. Still, investors should focus on Fed officials' speeches at 5:00 p.m. and 7:00 p.m. UTC. Technically, GBP/USD will probably remain under bearish pressure if the pair's exchange rate remains below the important 1.26000 level.