XAU/USD Reaches a 3-Month High on Rising Expectations of a Rate Cut by the Fed
The gold (XAU) price surged over 2,100 on Monday, driven by increased chances for an interest rate cut in June by the US Federal Reserve (Fed).
Friday's weak US manufacturing and consumer sentiment data increased the probability of a US interest rate cut in June, prompting a sharp rally in gold. After rising by 1.95% on Friday, XAU/USD gained 1.5% on Monday, reaching a 3-month high. The chances that the Fed will ease its monetary policy in June currently stand at 66%, according to CME FedWatch Tool.
Also, safe-haven flows induced by persistent geopolitical uncertainty supported the price of precious metals.
"Heightened geopolitical tensions around the world have reduced the short-selling appetite, basically, all strengthening gold's current buy-on-dips credentials," wrote Ole Hansen, the head of commodity strategy at Saxo Bank.
"Powell speaks two times this week, and he could come out and be a bit more dovish we could see a miss on the (US) jobs data on Friday, all factors that will help gold," noted Phillip Streible, the chief market strategist at Blue Line Futures.
XAU/USD continued to rise during the Asian and early European trading sessions. The market seems to be overreacting to dovish interest rate expectations but producing a milder response to the possibility of a hawkish monetary policy. Overall, traders are positioned to see weak economic figures and have already priced in worse-than-expected macroeconomic data. Therefore, XAU/USD may sharply correct downwards if US macroeconomic reports suddenly reveal a stronger-than-expected result. Today, traders should focus on the Services Purchasing Managers' Index (PMI) report by the Institute of Supply Management (ISM) at 3:00 p.m. UTC. If the figures are lower than expected, the rally in gold will likely continue but probably not as rapidly as previously. However, XAU/USD will most certainly fall sharply, possibly below 2,100, if the data are better than expected.
"Spot gold may retest resistance at $2,122 per ounce, after a shallow correction into the 2,099–2,105 range," said Reuters analyst Wang Tao.
The Euro Strengthens on Weak US Economic Data
The euro (EUR) rose towards 1.08650 on Monday, its highest point since 1 February, as investors focused on the upcoming European Central Bank (ECB) meeting to get more insights into the monetary policy path.
Traders expect policymakers to keep interest rates unchanged but will look for hints from ECB President Christine Lagarde on the timing of future rate cuts. Recent data showed that eurozone inflation was cooling more slowly than expected—to 2.6% in February instead of a 2.5% forecast. Meanwhile, the core inflation rate reached 3.1%, meaning the ECB should take a more cautious approach towards easing monetary policy.
The US Dollar Index (DXY) remained below 104 on Monday. The recent ISM data indicated the US manufacturing sector has shrunk for the 16th consecutive month in February, the longest decline in 22 years. Meanwhile, the Michigan survey revealed rather bleak consumer sentiment due to worsening expectations and current economic conditions. The euro recovered strongly on Friday following data indicating a slowdown in the US economy. Weakening economic indicators imply that the Federal Reserve's projection of only 3 rate cuts this year could be accurate.
The EUR/USD pair was moving sideways in the early hours of Tuesday's trading session. Traders should focus on two events today: the eurozone Producer Price Index (PPI) at 10:00 a.m. UTC and the US Services Purchasing Managers' Index (PMI) at 3:00 p.m. UTC. The figures that suggest the US economy is weakening will increase the probability of imminent rate cuts, pushing the EUR/USD higher. However, EUR/USD may correct sharply downwards if the figures come out better than expected.
The Bearish Trend in AUD/USD is Weakening
The Australian dollar (AUD) lost 0.18% on Monday despite a minor decline in the US Dollar Index (DXY).
AUD/USD has been in a downtrend since the end of December 2023, when investors started to price in fewer rate cuts by the Federal Reserve (Fed) in 2024. However, the bearish trend has weakened over the past few weeks as investors reconsidered their expectations and now predict the Fed will deliver its first rate cut in June. According to the latest interest rate swap market data, traders don't expect the Reserve Bank of Australia (RBA) to cut the rates until August. Therefore, AUD/USD may begin moving sideways soon, and a new bullish trend may commence, particularly if the US data continues to be weaker than expected. Some market participants believe that fundamental factors and strong technical resistance limit the DXY rise.
"The US dollar is in fact running out of room to run up further against most G10 currencies," said Helen Given, the FX trader at Monex USA.
AUD/USD continued to decline during the Asian and early European trading sessions, even though the Australian Bureau of Statistics reported a sharp increase in Australia's current account surplus in December. Later today, traders should focus on the US Services Purchasing Managers' Index (PMI) report coming out at 3:00 p.m. UTC. If the data is weaker than expected, AUD/USD may rally sharply, probably above 0.65100. Otherwise, the bearish trend may continue, with traders targeting 0.64400.