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Gold Drops as US Dollar Strengthens; Euro Declines on ECB Rate Cut Speculations

Published 09/10/2024, 05:17 AM
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Gold faces downward pressure as USD strengthens

Gold (XAU/USD) experienced downward pressure on Monday as the US dollar (USD) strengthened due to reduced expectations of a 50-basis-point (bps) rate cut by the Federal Reserve (Fed).

Last week's report revealed that US employment growth in August fell short of expectations. Still, the decline in the unemployment rate towards 4.2% and consistent wage growth signaled that the labor market remains relatively strong, reducing the likelihood of a larger Fed interest rate cut. According to the CME FedWatch Tool, traders now see a 71% probability of a 25-basis-point (bps) cut at next week's Fed meeting, with a 29% chance of a 50-bps reduction.

Additionally, the overall positive sentiment in equity markets damaged gold's safe-haven appeal. Wall Street's three major stock indices rebounded on Monday, following a week of significant declines. On a broader scale, XAU/USD has been trading within a range of $2,470–$2,530 for the past three weeks as investors seek further clarity on the Federal Reserve's rate-cut trajectory.

XAU/USD declined during the Asian trading session. Today, the formal macroeconomic calendar is uneventful. Investors are holding off ahead of Wednesday's release of the US Consumer Price Index (CPI) for August, followed by the Producer Price Index (PPI) on Thursday. Both reports could impact expectations for a potential Fed rate cut.

"Spot gold may retrace to $2,494 per ounce, following failure to break resistance at $2,507", said Reuters analyst Wang Tao.

Euro Declines on the Possibility of ECB Rate Cut

EUR/USD continued a downward correction on Monday. The pair lost 0.46% and closed below the support level of 1.10500.

Friday's mixed US labour data didn't clearly indicate whether the Federal Reserve (Fed) would opt for a 25-basis-point (bps) rate cut or a more substantial 50-bps decrease at the next policy meeting. Market participants currently anticipate the release of the US Consumer Price Index (CPI) report on Wednesday for further guidance regarding the US interest rate trajectory. However, the Fed has emphasised that employment remains a higher priority over inflation.

According to a Reuters survey, the headline CPI figures are projected to increase by 0.2% month-on-month in August, the same as in July. A weaker-than-expected report could bolster market expectations for a 50-bps reduction. Meanwhile, the data meeting expectations might leave the debate surrounding a 25-bps versus 50-bps rate cut unresolved. As noted by Charu Chanana, head of currency strategy at Saxo Bank, this uncertainty persists.

The European Central Bank (ECB) will convene its policy meeting on Thursday. The regulator will probably reduce interest rates once again. However, the main focus will be on officials' statements at the press conference. Currently, traders are factoring in about 0.63 percentage points of anticipated easing by the ECB this year.

EUR/USD has been moving sideways during Asian and early European trading sessions. The pair stays below the 1.10500 resistance level. Today, no major events that can influence this pair are expected to be released.

Canadian Dollar Is Near Two-Week Highs, But the Fundamental Trend Is Bearish

The Canadian dollar (USD/CAD) gained 0.11% against the US dollar (USD) on Monday as USD/CAD traders took profit on their long positions after a massive rally on Friday.

Friday's US nonfarm payroll (NFP) data boosted the US dollar, but a Canadian Employment report showed a rise in the unemployment rate, weakening the Canadian dollar and pushing USD/CAD higher. Indeed, Canada's unemployment rate increased towards 6.6% in August, a three-year high, prompting economists to call for larger rate cuts from the central bank.

"We continue to see a significant chance that central bankers will need to lower the policy rate in October by 50 basis points (bps) to avoid falling behind the curve", said Royce Mendes, head of macro strategy at Desjardins Group.

Last week, the Bank of Canada (BOC) cut its key policy rate by 25 basis points towards 4.25%. It was the third rate reduction in a row, and BOC governor Tiff Macklem said that deeper rate cuts could be implemented if the economy needed support. However, the market still expects the BOC to pursue a less dovish monetary policy than the Federal Reserve in the medium term. Therefore, the fundamental bearish pressure on USD/CAD may persist for some time.

USD/CAD was rising slightly during the Asian and early European trading sessions. Today, the macroeconomic calendar doesn't feature data releases that might significantly impact USD/CAD. Still, traders should monitor the upcoming speeches by central bank officials for any new clues on future changes in monetary policy. Tiff Macklem and Fed members Michael Barr and Michelle Bowman will give speeches at 1:10 p.m., 2 p.m., and 4:15 p.m. UTC, respectively. As long as USD/CAD is below the important 1.36000 level, bears will remain in control, and traders will likely prefer to sell the rallies.

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