Gold May Drop Below 2,000 Due to Shifted Expectations of a Rate Cut by the Fed
On Thursday, the gold (XAU) price rose, driven by a decline in US Treasury yields after Gross Domestic Product (GDP) data revealed a slowdown in inflation.
However, gold is still on track for its second consecutive weekly decline, influenced by a strong US dollar and a resilient US economy. Official data revealed the US economy expanded more rapidly than anticipated in Q4, driven by robust consumer spending and reduced inflationary pressures. This week's GDP and S&P Global reports show that the US economy in January seems healthy.
Nevertheless, XAU/USD managed to recover its losses and rose by 0.35% on Thursday as traders focused on easing inflation.
"The economy is running a lot hotter than expected, but at the same time, we are having a situation where inflation is coming down. Therefore, we shouldn't prepare for a big spike in interest rates," remarked Bart Melek, a head of commodity strategies at TD Securities.
He noted this scenario is proving to be beneficial for gold. Market participants have adjusted their interest rate cut expectations, pricing in a 92% probability for a rate cut in May.
In the Asian and early European trading sessions, XAU/USD was relatively stable. Today, market participants await the US Personal Consumption Expenditures (PCE) Price Index report at 1:30 p.m. The Federal Reserve (Fed) uses the PCE data to measure the progress in achieving its 2% inflation target. If the core PCE figure is lower than the forecast, XAU/USD may rise above 2,030. However, better-than-expected data may deepen the bearish trend in gold.
"Spot gold may retest support of $2,010 per ounce, a break below could open the way towards the $1,997–$2,005 range," said Reuters analyst Wang Tao.
The Dovish ECB Statement Causes the Euro to Fall
The euro (EUR) lost 0.34% on Thursday after the European Central Bank (ECB) left interest rate unchanged and made dovish remarks in its monetary policy statement.
EUR/USD experienced above-normal volatility in yesterday's trading session as investors digested the ECB's post-meeting statement. Also, ECB President Christine Lagarde's press conference and the US Gross Domestic Product (GDP) added bearish pressure on the pair. The GDP report showed that the US economy grew faster than expected in Q4 due to strong consumer spending. Despite the Federal Reserve's (Fed) aggressive rate-hiking campaign, GDP expanded by a 3.3% annualized rate last quarter after advancing at a 4.9% pace in Q3. Still, the GDP report also showed easing inflation, and traders continued to price in a smaller chance for a rate cut in March while considering a 95% probability for a 25 basis point (bps) rate reduction in May.
Meanwhile, the ECB left its refinancing rate at 4.50% and the deposit rate at 4.0%, as expected. However, in its monetary policy statement, the ECB expressed confidence that inflation is slowing and will continue to ease further. The market interpreted the message as a dovish signal, immediately leading to a sell-off in EUR/USD. 'Given the cautiously dovish tone of today's meeting, the risk of a cut before June has increased somewhat,' said Martin Wolburg, a senior economist at Generali (BIT:GASI) Investments.
EUR/USD continued to decline slightly during the Asian and early European trading sessions. Today, all eyes will be on the US Personal Consumption Expenditure (PCE) report released at 1:30 p.m. UTC. If the core PCE Price Index is higher than expected, it will doubt the Fed's ability to cut interest rates in Q1, possibly pushing EUR/USD below 1.08000. Otherwise, lower figures would weaken the US dollar and may push EUR/USD above 1.08800.
AUD/USD Continues to Move Sideways, But the PCE Report May Affect the Pair
The Australian dollar (AUD) was essentially unchanged on Thursday, even though other major currencies experienced noticeable volatility due to the release of US macroeconomic reports.
Australian stock exchanges and banks will be closed today due to Australia Day. Thus, the volatility may remain relatively low. Overall, AUD/USD has been trading in a narrow 0.65200–0.66150 range for over a week. Fundamentally, the divergence between Australian and US monetary policies still favors AUD. Now, the market anticipates more rate cuts from the Federal Reserve (Fed) than from the Reserve Bank of Australia (RBA). According to the latest interest rate swap market data, traders are currently pricing in only 40 basis points (bps) worth of rate cuts by the RBA and 140 bps of cuts in the US by the end of 2024. Furthermore, the People's Bank of China (PBOC) recently announced it would keep the benchmark lending rate at a record low—3.45%, which should continue to support China's economy and boost the demand for Australia's exports.
AUD/USD was flat during the Asian and early European trading sessions due to the national holiday. Still, the pair may face heightened volatility in the American session when the Personal Consumption Expenditure (PCE) Price Index report comes out at 1:30 p.m. UTC. The short-term technical bias remains bearish as the Australian dollar trades below the important intraday level of 0.66000. However, the picture might rapidly change if the PCE data surprises the market. Higher-than-expected numbers might bring AUD/USD below 0.65500, while lower-than-expected figures may push the pair above 0.66000, triggering a new bullish trend.