Gold May Drop Below 2,020 as the Fed Remains Hawkish
On Monday, the gold (XAU) price declined as market participants' expectations of a US interest rate cut in March decreased.
Robust growth in equity markets further diminished the appeal of gold as a safe-haven asset. Jim Wyckoff, a senior analyst at Kitco Metals, pointed out that technical selling coupled with a surge in stock markets are probably the main factors restraining purchasing gold and silver. 'We have had better US economic data lately that suggests the Fed may have to hold off longer on lowering interest rates,' he said. Elevated interest rates also increase the opportunity cost of holding non-yielding bullion.
Gold decreased by around 1% last week, having the most significant weekly dip in 6 weeks, following the US Federal Reserve's (Fed) hawkish comments. Officials said they need to consider more inflation data before deciding on rate cuts, hinting at Q3 as the earliest point for rate reductions. According to the CME Fed Watch Tool, the market suggests approximately a 43.5% probability of the rate cut in March, decreasing from 70% at the beginning of the previous week.
XAU/USD recovered from yesterday's decline during the Asian and early European trading sessions. Today, the volatility will remain muted as the economic calendar is uneventful. However, any unforeseen geopolitical developments may affect the price of gold. 'Spot gold may retest support of $2,016 per ounce, as it could have completed a bounce from $2,001.72,' said Reuters analyst Wang Tao.
The Euro Continues to Rise Ahead of the ECB's Interest Rate Decision
The euro (EUR) didn't change much on Monday as traders continued to wait for the European Central Bank's (ECB) interest rate decision.
The ECB will announce its monetary policy updates at 1:15 p.m. UTC on 25 January. Most economists polled by Reuters expect the central bank to leave its refinancing rate at 4.50% and deposit rate at 4.0%. However, the regulator will probably provide important forward guidance, outlining the euro's possible direction in the near term. Overall, the ECB doesn't look ready to begin butting interest rates: headline inflation remains above the official 2% target, while tensions in the Red Sea pushed cost inflation higher due to rising freight rates.
Now, the market is pricing in roughly 125 basis points (bps) worth of rate cuts from the ECB by the end of 2024, with the first cut in March or April. If the ECB makes any hawkish comments and investors dial back their expectations for rate cuts, EUR/USD may rally above 1.09400. Investors now see the Federal Reserve (Fed) to be more dovish, with 135 bps rate cuts in 2024, than the ECB, so the divergence in monetary policies favors the euro.
EUR/USD was rising during the Asian and early European trading sessions. Today, US reports may affect the pair's exchange rate. Specifically, the Richmond Fed Manufacturing Index publication at 3:00 p.m. UTC could shift investors' expectations regarding US monetary policy. If the figures are better than expected, EUR/USD may decline slightly, probably towards 1.08800. Otherwise, the pair may rally towards 1.09300 on weak economic data.
The Australian Dollar Rises but Faces Strong Resistance in the 0.66000–0.66400 Area
The Australian dollar (AUD) lost 0.41% on Monday as the US Dollar Index (DXY) strengthened on decreasing expectations for an interest rate cut from the Federal Reserve (Fed) in March.
Despite having losses yesterday, AUD/USD remains within a short-term bullish trend. Investors now consider the Reserve Bank of Australia (RBA) one of the least dovish central banks among G10 countries. The market believes the RBA will lag in shifting the monetary policy towards a dovish one. In fact, markets think the RBA won't cut interest rates until September, with only 36 basis points (bps) rate cuts this year. At the same time, the US economy's resilience may force the Fed to postpone rate reductions, putting bearish pressure on AUD/USD. Still, the short-term technical bias remains bullish as the AUD remains above the important intraday level of 0.65650.
AUD/USD was rising during the Asian and early European sessions. Today, traders should focus on 2 events: the Richmond Fed Manufacturing Index at 3:00 p.m. UTC and Australias's Judo Bank Manufacturing Purchasing Managers' Index (PMI) due at 10:00 p.m. UTC. Both reports can impact investors' interest rate expectations.