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Gold Falls From All Time High; Euro Drops as Dollar Strengthens on Strong US PMI

Published 04/02/2024, 04:33 AM
Updated 02/20/2024, 03:00 AM

Gold's Bull Run Stutters After the Release of Strong US PMI Data

Gold (XAU) fell after reaching an all-time high on Tuesday following the release of strong US ISM Manufacturing Purchasing Managers' Index (PMI) figures.

The rally in gold paused due to contradicting signals. The US PMI reports showed that the manufacturing sector expanded in March after 1.5 years of contraction. Strong PMI numbers led the market to reconsider the likelihood of a rate cut by the Federal Reserve (Fed) in June. According to the CME FedWatch Tool, the chance of a rate reduction in June is now 63%, compared to around 70% before the report's release. Last Friday, Fed Chair Jerome Powell commented that,

"The recent US inflation figures align with the central bank's expectations", adding that 'we don't need to be in a hurry to cut' as the US economy remains resilient.

Gold recovered by the end of Monday, sustaining the upward trend that pushed XAU/USD towards record highs around 2,265–2,266. Despite the cautious market sentiment, the limited decline in gold prices amidst ongoing geopolitical tensions highlights its status as a safe-haven asset in times of political and economic uncertainty.

XAU/USD continued to rise during the Asian and early European trading sessions. Today, traders should pay attention to a key US report: the JOLTs Job Openings will be released at 2:00 p.m. UTC. The report will provide insights into the current state of the US labor market, potentially influencing investors' interest rate expectations and affecting gold prices. If the data exceed expectations, the chance of a rate cut by the Fed in June may further decrease, likely causing XAU/USD to drop, possibly below 2,230. A weaker-than-expected report could increase the chances of an imminent rate cut, potentially driving XAU/USD towards 2,270.

"Spot gold may retest resistance at $2,267 per ounce, a break above which could open the way towards the 2,275–2,288 range," said Reuters analyst Wang Tao.

EUR/USD Weakens But May Correct Upwards on Strong German CPI Report

The euro (EUR) lost 0.46% on Monday as the US dollar strengthened due to better-than-expected US ISM Manufacturing Purchasing Managers' Index (PMI) figures.

The Institute for Supply Management (ISM) survey, published yesterday, showed that US manufacturing activity grew in March for the first time in 1.5 years as production rebounded sharply and new orders increased. Most importantly, the report indicated that input prices rose at the fastest pace since July 2022, suggesting that inflation could accelerate in the upcoming months. 'If the contraction of manufacturing activity is over and price pressures are building in manufacturing, which appears to have been happening for the last 3 months, then this would have implications for the path for interest rates in 2024,' said Conrad DeQuadros, the senior economic advisor at Brean Capital. Indeed, the market immediately lowered the probability of an interest rate cut in June to about 62% from around 70% before the PMI report came out. Moreover, investors have started to price in fewer than 3 rate cuts in 2024, triggering a rise in the US Dollar Index (DXY).

Meanwhile, the market continues to expect roughly 88 basis points worth of rate cuts from the European Central Bank (ECB) in 2024. This divergence in monetary policy between the ECB and the Federal Reserve puts downward pressure on EUR/USD and may potentially push the pair below the important 1.06900 level.

EUR/USD was falling during the Asian and early European trading sessions. Today, traders should focus on inflation reports from Germany. Each state will publish its Consumer Price Index (CPI) reports starting at 8:00 a.m. UTC, with the final report due at 12:00 p.m. UTC. If the inflation figures are higher than expected, investors will have to readjust their rate cut expectations significantly, resulting in a rally for EUR/USD. Conversely, lower-than-expected CPI numbers will likely extend the bearish trend and bring the pair down towards 1.06500.

The Australian Dollar Declines on Strong US Dollar and Cautious RBA Officials

The Australian dollar (AUD) lost 0.51% on Monday as the Dollar Index (DXY) rose following the release of the better-than-expected ISM Manufacturing Purchasing Managers' Index (PMI) report.

AUD/USD has dropped below the critical 0.65000 level, essentially invalidating the bullish trend that started in October 2023. The pair will likely trade sideways as investors seek clarity on the future interest rate path in the US and Australia. The recent strong macroeconomic data from the US raises questions about the Federal Reserve's (Fed) ability to deliver 3 interest rate cuts this year, giving the US dollar a short-term boost.

At the same time, the Reserve Bank of Australia's (RBA) March meeting minutes, released earlier today, showed that bank officials didn't discuss raising the cash rate for the first time in many months. Although the market agrees on the end of the tightening cycle in Australia, the minutes might still have had a minor bearish impact on AUD/USD.

AUD/USD was relatively flat during the Asian and early European trading sessions. The macroeconomic calendar is rather uneventful today, so volatility will be close to average. However, the release of the US JOLTS Job Openings report could trigger significant movement in the US Dollar Index and affect all USD pairs, including AUD/USD. Although the report is a lagging indicator, it might still provide some clues about the state of the US labor market. Higher-than-expected figures will likely support US dollar, while weak results might push AUD/USD slightly higher.

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