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Gold Continues Rising to New Highs; EUR/USD Rises on Dovish Fed Comments

Published 04/03/2024, 05:29 AM
Updated 02/20/2024, 03:00 AM

Gold Continues to Establish New Highs

Gold (XAU) rose by 1.28% towards new highs on Tuesday, driven by increasing concerns over rising inflation, which has fueled the demand for gold as an inflation hedge.

Traditionally seen as a hedge against inflation and a safe-haven asset in times of uncertainty, the gold price has increased by over 10.8% since the beginning of the year. XAU/USD is now on track for its seventh consecutive daily rise.

"Right now, gold is sensing that inflation is more of a driving variable than interest rates, and part of the momentum is also driven by speculators, hedge funds, and commodity funds that start buying gold whenever their quantitative systems give them signals," noted Marex analyst Edward Meir.

Rising geopolitical tensions in the Middle East enhance XAU/USD's appeal as a safe-haven asset, and a weaker US dollar further supports the gold price. However, decreasing chances that the Federal Reserve will begin cutting interest rates in June might limit its gains. Amid escalating conflicts between Russia and Ukraine, Middle East tensions, and a catastrophic earthquake in Taiwan, investor sentiment has leaned towards a cautious one. Thus, safe-haven flows go into gold, supporting the bullish momentum.

XAU/USD was rising slightly during the Asian and early European trading sessions. Today, traders should focus on US economic reports: the US ADP Employment Change at 12:15 p.m. UTC and the ISM Services Purchasing Managers' Index (PMI) at 2:00 p.m. UTC. If the data exceeds expectations, gold may correct towards 2,265. Meanwhile, lower-than-expected figures will support the bullish trend in gold. Additionally, Fed Chair Jerome Powell's speech may trigger volatility in gold. Dovish comments will push XAU/USD higher, while hawkish remarks will support the US dollar and put downward pressure on gold.

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"Spot gold may break resistance at $2,288 per ounce and rise towards the $2,302–$2,319 range," said Reuters analyst Wang Tao.

EUR/USD Rises Above 1.07500 on Dovish Fed Statements

The euro (EUR) gained 0.23% on Tuesday as the US dollar weakened, following dovish comments from several Federal Reserve (Fed) officials.

Despite yesterday's German inflation figures being weaker than expected and the US JOLTS Job Openings report being relatively upbeat, EUR/USD rose above the 1.07500 level. Dovish comments from several Fed policymakers overshadowed the negative macroeconomic news for EUR/USD and triggered a bullish reaction in the pair. Loretta Mester, Cleveland Fed President, and Mary Daly, San Francisco Fed President, mentioned that it would be reasonable to cut US interest rates 3 times this year. Investors have recently begun to doubt whether the Fed will be able to deliver 75 basis points (bps) worth of rate cuts this year, given that US macroeconomic data have been stronger than expected. However, yesterday's comments from Fed officials have dispelled those doubts and weakened the US dollar.

Meanwhile, the divergence in monetary policy expectations between the Fed and the European Central Bank (ECB) continues to be bearish for the EUR/USD. According to interest rate swap market data, the market is now pricing in 90 bps worth of rate cuts by the ECB and less than 70 bps of rate reductions by the Fed in 2024.

EUR/USD was rising slightly during the Asian and early European trading sessions. Today, several important events could trigger a strong market reaction in all USD pairs, including EUR/USD. The eurozone inflation report will be released at 9:00 a.m. UTC. If the figures are lower than expected, EUR/USD may fall below 1.07500. Then, 2 US reports—ADP Employment at 12:15 p.m. UTC and ISM Services PMI at 2:00 p.m. UTC—will add extra volatility to the market. Better-than-expected figures will almost certainly push EUR/USD lower, possibly below 1.07000. Otherwise, the short-term bullish trend in EUR/USD will likely continue, and the pair may rise towards 1.08000.

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This Week Will Determine the GBP/USD Trend

The British pound (GBP) gained 0.22% on Tuesday after Federal Reserve (Fed) officials suggested that 3 rate cuts are still possible this year.

GBP/USD has been in a clear bearish trend since mid-March as U.K. inflation slowed and traders increased their bets that the Bank of England (BOE) will deliver more rate cuts this year than the Fed. Indeed, 2 of the most hawkish BOE members didn't vote for more rate hikes at the last policy meeting. At the same time, Fed officials continue to sound dovish, projecting 3 rate cuts this year.

"There is some risk that we could see a break of $1.25, but it really hinges on seeing further strong US data, not just OK data," said Erik Nelson, a macro strategist at Wells Fargo.

Indeed, this week's data could determine the GBP/USD trend in the medium term: the US will release macro statistics on the labour market, including the critical Nonfarm Payroll (NFP) report due on Friday.

GBP/USD was rising during the Asian and early European trading sessions. Today, traders should focus on 2 US reports: the ADP Employment at 12:15 p.m. UTC and the ISM Services PMI at 2:00 p.m. UTC. If the data are stronger than expected—pointing to a tight labour market and suggesting an expansion in business activity—GBP/USD may break below 1.25000. However, weaker-than-expected reports may push GBP/USD above 1.26000, but overcoming further resistance may be challenging.

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