Gold Moves Sideways as Investors Await the Fed Interest Rate Decision
Initially, the gold (XAU) price dropped below 2,150 on Monday but then recovered and settled just slightly below the 2,160 mark as investors repositioned ahead of 5 central bank interest rate decisions.
XAU/USD has been in a short-term bearish trend since 12 March, when the US reported higher-than-expected inflation figures, prompting investors to reconsider their dovish interest rate expectations. Indeed, the probability of a 25-basis-point (bps) rate cut by the Federal Reserve (Fed) in June has declined by more than 20% and currently stands at just over 50%. Fundamentally, two confronting factors pull precious metals' prices in different directions. On the one hand, XAU/USD rises because it's considered an inflation hedge, and global inflation remains relatively high. On the other hand, central banks tighten monetary policies when inflation increases, damaging gold's appeal as the asset doesn't yield any passive income. However, geopolitical tensions also push XAU/USD higher, so the pair has managed to reach a record-high level lately.
XAU/USD was flat during the Asian and early European trading sessions. Today's historic decision by the Bank of Japan (BOJ) to end its policy of negative interest rates had little impact on gold. Likewise, the decision of the Reserve Bank of Australia (RBA) to hold the rates steady didn't produce much volatility. Fundamentally, these decisions are bearish for gold, making money more expensive to borrow and raising the opportunity cost of holding non-yielding assets.
However, because gold is priced in the US dollar, the main event for gold traders will be the Fed interest rate decision on Wednesday and the release of its latest economic projections. The projections will include the so-called 'dot plot', showing how each Fed member sees the path of US interest rates. Until then, XAU/USD will likely move sideways with a minor bearish tilt. 'Spot gold may retest support at $2,146 per ounce, as a correction from the 8 March high of $2,194.99 looks incomplete,' said Wang Tao, the Reuters analyst.
The Euro Declined, but the Bearish Momentum has Weakened
The euro (EUR) lost 0.15% on Monday as it continued to move within a short-term bearish trend triggered by the stronger-than-expected US Producer Price Index report published last Thursday.
Fundamentally, after US inflation data was released last week, investors have scaled back their expectations for an interest rate cut by the Federal Reserve (Fed) in June. However, they continue to expect the European Central Bank (ECB) to start easing monetary policy in the summer. According to interest rate swap market data, the market is pricing in 84 basis points (bps) worth of rate cuts by the ECB and just over 70 bps of rate cuts by the Fed in 2024. Thus, EUR/USD declines because investors consider the Fed less dovish than the ECB. The Fed's decision this Wednesday will test investors' interest rate expectations. Traders await the US central bank decision and are unlikely to enter large positions ahead of it. Thus, EUR/USD may continue to move sideways with a minor bearish tilt until the Fed meeting on Wednesday.
EUR/USD declined slightly during the Asian and early European trading sessions. The nearest major target for bears is located in the 1.08100 area. Conversely, bulls have to push the exchange rate back above the 1.09000 level to invalidate the underlying bearish trend. EUR/USD is unlikely to reach any of these levels until the Fed announces its interest rate decision tomorrow.
USD/JPY Rallies Above 150.000 After the BOJ Ends Its Ultra-Loose Monetary Policy
The Japanese yen (JPY) was essentially unchanged on Monday, as traders awaited the Bank of Japan's (BOJ) interest rate decision. However, USD/JPY rallied sharply earlier today despite the BOJ having raised its base rate for the first time in 8 years.
The decision by the BOJ to end its ultra-loose monetary policy has had a bearish effect on the Japanese yen so far. The Japanese central bank announced it would end the practice of negative rates, abandon the yield curve control (YCC), and discontinue the purchase of risk assets like exchange-traded funds (ETF) and real estate investment trusts. However, the BOJ also gave dovish signals in its monetary policy statement. The regulator said it would keep buying broadly the same amount of government bonds as before and increase purchases if yields rise rapidly.
The Japanese yen immediately devalued on the news, with USD/JPY rallying sharply higher, breaking above the critical 150.000 mark. 'It's a classic "buy the rumor, sell the fact". I don't think the BOJ was going for the shock and awe approach this time,' said Bart Wakabayashi, the Tokyo branch manager at State Street (NYSE:STT). If the market priced in BOJ's decision in advance, then USD/JPY may continue to rally because the divergence in monetary policies between the BOJ and the Federal Reserve (Fed) favors the US dollar. However, USD/JPY has already approached a very strong resistance in the 150.000–152.000 area. In the past, the BOJ intervened at this level to support JPY.
In the short term, USD/JPY may stabilize within 150.000–150.600 until tomorrow's Fed policy decision clarifies the future path of US interest rates, impacting the US dollar. According to Reuters, analysts expect the Fed to maintain its Funds Target Rate within the 5.25–5.50% range. Still, the market expects roughly 70 basis points of rate cuts in 2024. Thus, traders don't expect a hawkish surprise from the Fed. However, a surprise isn't unlikely, as the recent data indicated sticky US inflation. Therefore, if the Fed does give hawkish signals, USD/JPY may break above the critically important 152.000 level. Conversely, a dovish message from the Fed will likely bring USD/JPY below 150.000.