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Gold at 2-Week High; US Dollar Dips, Euro Rises on Disappointing US Economic Data

Published 03/04/2024, 04:11 AM

Gold Reaches a 2-Week High as USD Dips on Disappointing US Economic Data

The gold (XAU) price surged by almost 2% on Friday as the US dollar weakened substantially following the release of much weaker-than-expected US macroeconomic data.

Business activity in the US manufacturing sector continued to decline in February, with factory employment dropping to a 7-month low amid falling new orders, the Institute of Supply Management (ISM) report showed on Friday. In addition, the ISM Manufacturing Price Index, a proxy for the Producer Price Index (PPI), were lower than expected, raising the probability of the rate cut in June by the Federal Reserve (Fed).

The market currently prices in a 27% chance of a 25-basis-point (bps) rate reduction in May and a 54% chance of a 25-bps rate cut in June, according to CME FedWatch Tool. The price of gold tends to rise when the market solidifies its expectations for the interest rate cut, as lower interest rates increase the attractiveness of non-yielding assets such as metals. 'In 3–4 months, prices will hit a record if we see poor economic data and the market is convinced that (the) Fed is ready to cut', said Bart Melek, the head of commodity strategies at TD Securities.

XAU/USD was essentially unchanged during the Asian and early European trading sessions. Today, the formal economic calendar is uneventful, so no events could trigger a strong market move. Therefore, a bullish trend in gold might continue, with investors seeing any dips as buying opportunities. 'Spot gold may retest resistance at $2,088 per ounce, a break above which could lead to a gain into the $2,094–$2,099 range', said Reuters analyst Wang Tao.

The Euro Rises as Weak US Data Damages the US Dollar's Appeal

The euro (EUR) gained 0.31% on Friday as weaker-than-expected macroeconomic data damaged the US dollar's appeal and sharply lowered US Treasury yields.

EUR/USD traders received contradicting signals on Friday. On the one hand, Eurostat showed that eurozone inflation continued to ease in February but not as fast as the market expected. On the other hand, the Institute of Supply Management (ISM) revealed that the business activity in the US manufacturing sector was slowing, with new orders and prices falling. Overall, Friday's economic data was bullish for EUR/USD as it increased the chances of a rate cut by the Federal Reserve (Fed) in June while keeping eurozone rate cut expectations relatively unchanged.

EUR/USD was rising slightly during the Asian and early European trading sessions. Today, the economic calendar is relatively light, so volatility may remain low most of the day. Only the Sentix Index report, measuring the state of current economic conditions based on the survey of 1,600 financial analysts, will come out at 9:30 a.m. UTC. The report might trigger some volatility in EUR pairs, but its impact is usually muted. Technically, EUR/USD will probably remain under bullish pressure as long as the pair's exchange rate remains above the important 1.08300 level.

Weak US Economic Data Brings the US Dollar Down, While GBP Rebounds

The British pound (GBP) rose by 0.22% on Friday as the US dollar dropped after the weak ISM Manufacturing Purchasing Managers' Index (PMI) data.

Manufacturing activity in the US continued to decline in February, and the factory employment index reached its lowest point in 7 months due to falling new orders. Additionally, construction spending decreased in January instead of the expected growth. Following the data release, economists from Goldman Sachs adjusted the US Gross Domestic Product (GDP) growth rate Q1 forecast to 2.2%, reducing it by 0.2%.

Meanwhile, the U.K. manufacturing PMI data for February, released on Friday, slightly exceeded expectations but remained below the 50 mark, indicating contraction and persistent weakness in the U.K. economy. Huw Pill, the Bank of England (BOE) Chief Economist, stated that he believes the moment for the first interest rate reduction since the coronavirus pandemic is still 'some way off'.

GBP/USD rose slightly during the Asian and early European trading sessions. Today, the economic calendar is fairly light, so volatility may remain low. The British pound is expected to move sideways as interest rates in both the U.K. and the US will stay unchanged in the near future. The US dollar is now under bearish pressure due to weaker-than-expected economic data, so traders are paying close attention to economic indicators for any fresh hints about the timing of interest rate cuts by the US Federal Reserve.

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