Gold May Drop Below 2,000 Due to the US GDP Report
The gold (XAU) price fell by 0.79% on Wednesday after upbeat reports on US business activity.
Yesterday, gold had its most significant drop in a week.
"Gold prices are pretty insulated from a hawkish repricing in rates markets because there are signs that investors are historically under-positioned in gold despite markets expecting an imminent start to the Federal Reserve's (Fed) cutting cycle," explained Daniel Ghali, a commodity strategist at TD Securities.
The S&P Global survey showed signs of easing inflation and rising US business activity in January. With the US economy showing resilience and central bank officials expressing caution in cutting interest rates, some investors are reassessing their expectations of the pace of the Fed's rate cuts this year. High-interest rates generally increase the opportunity cost of holding non-yielding assets, like bullion. The CME's FedWatch tool indicates that markets believe the Fed will keep interest rates unchanged at its 30 – 31 January policy meeting. Also, investors' expectations of the rate cut have shifted from March to May.
XAU/USD was relatively flat during the Asian and early European sessions. Today, traders should monitor the US GDP Growth Rate report at 1:30 p.m. UTC. If the figures are lower than expected, XAU/USD will likely increase towards 2,025. However, the downward trend in gold could persist if numbers exceed the forecast.
"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 Euro Is at a Crossroads as the ECB Interest Rate Decision Looms
The euro (EUR) surged to a 9-day high on Wednesday but later lost most of the gains and settled below the pivotal 1.09000 level.
Yesterday's purchasing managers' survey, conducted by S&P Global, showed that the eurozone's businesses continue to struggle as activity contracted again in January due to falling demand. Meanwhile, price pressure rose as a result of escalating tensions in the Red Sea. Although the manufacturing figures improved somewhat, a steep decline in the services sector brought the composite index down.
"The data confirm our view that the economic weakness in the euro area will last longer than expected by the majority of economists and the European Central Bank (ECB)," said Christoph Weil at Commerzbank.
Indeed, recession risk is the primary reason investors expect the ECB to cut interest rates this year. The market is currently pricing in roughly 130 basis points (bps) worth of rate cuts in 2024, with the first 25 bps reduction in April.
EUR/USD was declining slightly during the Asian and European trading sessions. Today, the main event is the ECB's interest rate decision and its monetary policy statement at 1:15 p.m. UTC. In addition, ECB President Christine Lagarde may provide some forward guidance during the press conference, which will be held at 1:45 p.m. UTC. The regulator is facing tough choices. On the one hand, the economy continues to underperform, pushing the bank to make an early interest rate cut. On the other hand, inflation has yet to be fully defeated, while trade route disruptions in the Red Sea are pushing up consumer prices. Overall, the ECB will most likely keep interest rates unchanged at a record high. Still, the ECB probably views recession as a bigger threat to stability than inflation. Thus, it may adopt a dovish tone, likely pushing EUR/USD lower towards key levels of 1.08300 and 1.08950.
USD/JPY Drops Ahead of Today's US GDP Report
The Japanese yen (JPY) gained almost 0.6% on Thursday as US dollar bulls took profit after the USD/JPY failed to break above the important 148.800 resistance level.
USD/JPY has been trading in a tight range over the past week as traders juxtapose the latest Bank of Japan (BOJ) policy rate decision with the upbeat macroeconomic reports from the US Overall, investors' interest rate expectations have turned more hawkish, both for the BOJ and the Federal Reserve (Fed). Currently, interest rate swap market data indicates that traders are pricing in roughly 130 basis points (bps) worth of rate cuts from the Fed and 20 bps rate increases from the BOJ by the end of 2024. In absolute terms, these interest rate expectations support the US dollar compared to the Japanese yen. However, the divergence in monetary policy is turning less bullish for the USD/JPY, especially given that the pair is trading near historical highs. Thus, USD/JPY may eventually drop below 146.000, particularly if the US macroeconomic data disappoints investors or Japanese data starts to exceed expectations.
USD/JPY may rise slightly in the Asian and early European trading sessions. Today's main event for traders is the US Gross Domestic Product Growth report at 1:30 p.m. UTC. The report will come out simultaneously with other less critical but important releases: Durable Goods Orders and Jobless Claims. These reports may provoke substantial volatility in the market. Better-than-expected figures may have a minor bullish impact on USD/JPY as traders are already positioned on the long side. Otherwise, weak data may trigger a large sell-off in USD/JPY, bringing the pair towards the 146.00 level.