Gold Is Moving Sideways, Awaiting US CPI Data
The gold price (XAU) rose in the mid-afternoon session on Tuesday. The US dollar (USD) and Treasury yields weakened even though Producer Price Index (PPI) figures showed that US inflation continued to rise. Overall, XAU/USD gained 0.93% due to the weaker US dollar.
The US Bureau of Labor Statistics released a report on Tuesday indicating that PPI numbers rose by 0.5% in April, increasing from 0.2% in March. The figures exceeded the consensus estimate for a monthly increase of 0.3%. Core PPI numbers, excluding volatile items such as food and energy, reached 0.4% and were higher than the expected rise of 0.2%. Meanwhile, Federal Reserve (Fed) Chairman Jerome Powell said he expects US inflation to continue declining through 2024. He indicated that it's unlikely that the regulator will need to increase interest rates. The President of the Fed Bank of Cleveland, Loretta Mester, stated that it would be appropriate to maintain interest rates at the current level and await further evidence of reducing inflationary pressures.
The Consumer Price Index (CPI) in the United States rose by 0.4% in March, exceeding market expectations of 0.3%. US core consumer prices, which exclude volatile items such as food and energy, also rose by 0.4% in March, above market expectations of 0.3%. On an annual basis, core consumer inflation remained unchanged at 3.8%. If CPI numbers continue to be higher than expected, XAU/USD may drop. Otherwise, lower-than-expected figures may push the pair towards new highs.
XAU/USD has been moving sideways in the Asian and early European trading sessions ahead of the US CPI report release. However, there are signs that upside risks have returned to the gold market. According to Ryan McKay, a senior commodities strategist at TD Securities, any signs of weakness in economic data could serve as a catalyst, strengthening speculations about the potential for further gains in the precious metals market.
Euro Rises as Eurozone Economic Sentiment Improves
The euro (EUR) rose 0.28% on Tuesday as official data showed improvement in eurozone business confidence, while the US Dollar Index (DXY) declined despite higher-than-expected Producer Price Index (PPI) figures.
EUR/USD has been in an uptrend since mid-April, supported by weaker-than-expected US macroeconomic statistics and slightly better-than-expected European data. However, EUR/USD continued to rise yesterday despite US PPI figures being above the market forecast. Economists polled by Reuters forecasted the core PPI to be 0.2% in April, but the actual figure was 0.5%.
"Inflation at the producer level is back on the front burner this month, and consumers are sure to feel the heat as higher production costs will feed into the inflation they see in the goods and services they buy. If Fed officials were seeking some moderation from the inflation outbreak in the first quarter, it is not showing up at the start of the second quarter," said Christopher Rupkey, the chief economist at FWDBONDS.
Although investors still expect the Fed to deliver a rate cut in September this year, the probability of a 25-basis point (bps) rate reduction has now declined from almost 95% towards 80%. Meanwhile, the market continues to believe that the European Central Bank (ECB) will cut its base rate in June. This belief may now look a bit too optimistic, given that the latest data from Germany has been coming out better than expected. EUR/USD is currently facing strong resistance in the 1.08200–1.08800 area and needs a major fundamental impetus to break above this level.
EUR/USD was rising slightly during the Asian and early European trading sessions. The most important event of the week is today: the US Consumer Price Index (CPI) report will come out at 12:30 p.m. UTC. The result will likely have a major impact on investors' interest rate expectations and may determine the direction of EUR/USD in the medium term. If the figures are higher than expected, the pair will almost certainly correct downwards, possibly below 1.07600. However, lower-than-expected CPI numbers may extend the upward movement in EUR/USD, pushing the pair towards 1.09000.
JPY Weakens on Higher US PPI and Yield Disparity
The Japanese yen (JPY) fell by 0.14% on Tuesday following the higher-than-expected US Producer Price Index (PPI) numbers.
On Tuesday, the Bureau of Labor Statistics reported that the US PPI increased by 2.2% year-over-year in April. The data were up from the revised 1.8% rise in March, aligning with expectations. Meanwhile, the core PPI, which excludes volatile food and energy costs, rose by 2.4% year-over-year, compared to a 2.1% increase in March. On a monthly basis, both PPI and core PPI increased by 0.5% in April. Federal Reserve (Fed) Chair Jerome Powell reiterated on Tuesday that inflation is easing slower than anticipated, and high PPI figures support maintaining interest rates at a high level for longer. Higher-than-expected consumer prices in Q1 forced the market to significantly reassess the anticipated pace of rate cuts by the Fed. Now, the market expects around 45 basis points of reductions for this year, according to the CME FedWatch Tool.
The yield gap between Japanese and US bonds encourages traders to sell the Japanese yen. Japanese long-term yields remain at just 0.96%, despite recent hawkish rhetoric from the Bank of Japan (BOJ) and rising prospects for another rate hike in June. Finance Minister Shunichi Suzuki said that the Japanese government will closely collaborate with the central bank on the foreign exchange market and take all necessary measures if required. The chances of further intervention by Japanese authorities could support the national currency and limit USD/JPY growth.
USD/JPY declined in the Asian trading session. Today's release of the US Consumer Price Index (CPI) data at 12:30 p.m. UTC and Japan's Gross Domestic Product (GDP) Growth Rate at 11:50 p.m. UTC could significantly influence USD/JPY. If the US CPI data reveals higher-than-expected inflation, it might strengthen the USD as the chances of rate cuts by the Fed decrease. If Japan's GDP growth rate exceeds expectations, it could boost the JPY, indicating a robust economic recovery and potentially influencing the Bank of Japan's monetary policy stance. Key levels to watch are 156.000 and 156.500.