Gold Declined Slightly Following Reduced Chances of a Rate Cut by the Fed
On Tuesday, gold (XAU) pulled back by 0.2% due to a recovery in the US dollar and Treasury yields. This decline happened as traders reduced their expectations regarding the extent of interest rate cuts by major central banks this year.
Overall, expectations of upcoming rate cuts contributed to XAU/USD's 13% rise in 2023, marking its first yearly gain since 2020. Still, the chance of a 25-basis-point (bps) rate cut by the US central bank in March decreased from 90% to 70%. Thus, XAU/USD declined slightly because higher interest rates increased the opportunity cost of holding non-yielding bullion. Also, the US dollar rose sharply in the first trading session this year, rebounding from the previous month's lows. However, a sell-off in risky assets and escalating geopolitical tensions in the Middle East have supported gold. Ending 2023 on a strong note for the yellow metal, traders entered the new year cautiously, expecting a possible large pullback in XAU/USD.
XAU/USD was rising during the Asian and early European trading sessions. Today, traders should pay attention to a series of US macroeconomic reports. The data will likely affect the gold price in the short term. The ISM Manufacturing Purchasing Managers' Indices (PMI) report will come out at 3:00 p.m. UTC and could trigger some volatility. Market participants also await the Federal Open Market Committee (FOMC) minutes from the December meeting at 7:00 p.m. UTC. Protocols may give insights into the US interest rate hike path and increase volatility in the market. The release can significantly alter the recent trends in the US Dollar Index and gold. If FOMC minutes show the Committee sounded dovish, XAU/USD may break above the 2,080 level. However, if the members suggested that rates may need to remain higher for longer, the bullish trend in gold might reverse. 'Spot gold may retest support of $2,055 per ounce, a break below which could open the way towards $2,047,' said Reuters analyst Wang Tao.
The British Pound Retreated From a 5-month High
The British pound (GBP) declined towards 1.26000, falling from a 5-month high near 1.28200, the point achieved on 28 December.
The US dollar remained overall strong, even though it faces its first annual loss since 2020. A shift towards a more dovish policy at the Federal Reserve's December meeting intensified expectations of US interest rate cuts in 2024 and caused the decline of the US Dollar Index. While weakening the US dollar, the shift spurred rallies in other currencies, including GBP/USD.
Yesterday's final Purchasing Managers' Index (PMI) data showed that U.K. factory activity in December contracted for 17 consecutive months. In terms of monetary policy, investors expect that the US central bank may start cutting rates in March, suggesting more than 150 basis points (bps) worth of cuts over the next year. At the same time, traders are considering the possibility of interest rate cuts by the Bank of England (BOE) in 2024, even though BOE Governor Andrew Bailey has emphasised the need to keep rates higher longer.
GBP/USD was rising slightly during the Asian and early European trading sessions. Today, GBP traders should focus on the US macroeconomic reports: the US ISM Manufacturing PMI data at 3:00 p.m. UTC and the Federal Open Market Committee (FOMC) minutes at 7:00 p.m. UTC. Weaker-than-expected ISM Manufacturing PMI numbers may reverse the local bearish trend and push GBP/USD towards 1.26800. If figures come out higher than expected, GBP/USD may continue declining.