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Gold, Euro, Yen Drop Sharply on Hawkish Fed Minutes

Published 05/23/2024, 05:09 AM

Gold Drops Significantly as Fed Officials Seem Surprisingly Hawkish

Gold (XAU) fell by 1.75% on Wednesday towards the support level of 2,380 due to the hawkish Federal Reserve (Fed) Meeting Minutes.

The minutes of the last Fed meeting showed that policymakers need more time to ensure inflation is approaching the 2% target. Some officials advocated caution in reducing interest rates, while others were willing to discuss further rate hikes.

"Gold did take a bruising after the Fed minutes reminded investors that interest rate cuts are far from imminent," said Tim Waterer, chief market analyst at KCM Trade.

"There is a chance gold could drift back to support levels around the $2,355 region if the dollar keeps the upward momentum going," he added, noting that the medium to longer-term outlook still looks beneficial for gold.

However, everything will depend on an increase or decrease in the US interest rate.

In addition to the impact of the Fed minutes and officials' more hawkish stance than expected on XAU/USD, physical demand for gold has also decreased. Reuters reported that demand from India fell by almost 20% compared to the previous year, as record-high gold prices encouraged consumers to exchange old jewellery for new ones.

Today, the US will release several important reports: Jobless Claims and the Purchasing Managers' Index. The data will largely determine the further XAU/USD trend. If the data is negative for the US dollar, the price of gold may rise towards 2,400. If reports indicate resilience in the US economy, gold may decline towards the support level of 2,350.

"Spot gold may manage to stabilise around support at $2,363 per ounce and bounce towards $2,384," said Reuters analyst Wang Tao.

The Euro Drops on Hawkish FOMC Minutes

The euro (EUR) dropped by 0.3% on Wednesday following the hawkish Federal Open Market Committee (FOMC) Meeting Minutes.

EUR/USD declined on Wednesday after the FOMC Meeting Minutes revealed that the Federal Reserve (Fed) is firmly committed to waiting for more evidence that inflation is easing towards 2%. This reduced risk appetite as the US central bank sounded much less dovish than investors expected. Moreover, the report revealed that some officials are willing to raise interest rates, so the US Dollar Index (DXY) reached a one-week high on Wednesday, marking its best day this month against major currencies. According to the CME's FedWatch Tool, the chances of a rate cut in September have decreased towards 60%.

Still, the euro remains strong as market participants doubt whether the European Central Bank (ECB) will extend interest rate cuts beyond June. Some ECB policymakers believe a rate cut in June is likely, but a follow-up move could be premature. Regarding the inflation outlook, Bundesbank President Joachim Nagel said,

"There may well be months when inflation picks up a little, as some prices tend to fluctuate – energy prices in particular." He added, "On the whole, I expect inflation to carry on declining towards our 2% target and reaching it in 2025."

EUR/USD rose slightly during the Asian and early European trading sessions. Today, traders will focus on the results of the S&P Global Purchasing Managers' surveys from Germany at 7:30 a.m. UTC, the eurozone at 8:00 a.m. UTC, and the US at 1:45 p.m. UTC. These reports will likely trigger extra volatility in the market and in EUR/USD in particular, so traders should remain cautious. The short-term technical bias remains bullish as the pair moves above the important daily level of 1.0800.

Hawkish FOMC Minutes Further Weakened JPY

The Japanese yen (JPY) lost 0.30% on Wednesday as the US Dollar Index (DXY) rose after Federal Open Market Committee (FOMC) Meeting Minutes confirmed the Federal Reserve (Fed) officials' cautious stance on monetary policy easing.

 'Participants noted that the disinflation would likely take longer than previously thought,' the minutes said, indicating that the US central bank may maintain the high benchmark policy rate for an extended period. In addition, FOMC minutes revealed that Fed members discussed possible further hikes.

"The inclusion that some officials were willing to tighten policy further has given the USD a further uplift since the minutes were released," said Amarjit Sahota, director at Klarity FX.

Indeed, the probability of a rate cut by the Fed in September has now decreased towards 60% from around 95% a week ago. At the same time, according to interest rate swap market data, the market doesn't expect the Bank of Japan (BOJ) to tighten its policy until October. Thus, the gap in current interest rates between the US and Japan remains very wide. The present divergence in monetary policy expectations between the Fed and the BOJ continues to favor the US dollar. Therefore, even after several rounds of interventions in the Forex market by Japanese authorities, the yen continued to slide, declining by more than 2% since the beginning of May. The depreciation of the national currency may be challenging for the Japanese economy. A recent Reuters survey found that nearly half of Japanese firms believe the JPY's decline beyond 155 harms their businesses. More than a third of companies want the BOJ to increase interest rates further in response to the yen's downward trend. Traders should remain wary of the risk of more currency intervention by the Japanese authorities.

USD/JPY remains essentially unchanged during the Asian and early European trading sessions. Today's release of the US Jobless Claims at 12:30 p.m. UTC and the Manufacturing and Services Purchasing Managers' Index (PMI) at 1:45 p.m. UTC could affect USD/JPY. If US Jobless Claims figures exceed expectations and PMI numbers disappoint market participants, the US dollar may weaken, leading to a correction in USD/JPY. Otherwise, USD/JPY may rise even higher. The key levels for today are 156.800 and 156.000.

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