Gold trades near a 2-week high as the market focuses on today's Fed meeting
The gold (XAU) price rose by 0.21% on Tuesday as a weaker US dollar made the metal more appealing for holders of other currencies.
Still, XAU/USD failed to consolidate above the critical 2,045 level, as yesterday's drop in the US Dollar Index was inconclusive. Besides, the US macroeconomic reports were mostly stronger than expected, lowering the probability of an interest rate cut in March. While the Conference Board report revealed a minor drop in consumer confidence in January, the Bureau of Labour Statistics indicated an unexpected rise in job openings in December, showing that the labour market remains strong. Thus, the Federal Reserve (Fed) might be more willing to continue its tight monetary policy.
"Persistent demand for workers, while positive for continued economic growth, may throw a wrench into efforts to cool inflation early in 2024. This is again a sign of too much of a good thing, which should lead to a later-than-hoped shift to monetary policy easing," said Ben Ayers, a senior economist at Nationwide in Ohio.
XAU/USD was falling during the Asian and early European trading sessions. Even though today's main event is the Fed's interest rate decision at 7 p.m. UTC, the ADP Nonfarm Employment report release at 1:15 p.m. may also trigger some volatility. The market expects the Fed to leave its base rate unchanged at 5.25–5.50%. However, the regulator may add important details in its monetary policy statement that could affect investors' interest rate expectations in 2024. A hawkish statement that downplays rate cuts and focuses on inflation-fighting will trigger a sell-off in XAU/USD. Otherwise, a dovish message may push the gold price towards 2,050.
"Spot gold may retest support at 2,028 USD per ounce, a break below which could open the way towards 2,019–2,024 USD range," said Wang Tao, a Reuters analyst.
EUR/USD may be highly volatile today due to releasing of important data
The euro (EUR) strengthened on Tuesday following the release of better-than-expected Eurozone Gross Domestic Product (GDP) figures.
Although the release of the German GDP Growth Rate report revealed a contraction in the economy in Q4 2023 alongside stagnant economic growth in France, the eurozone managed to avoid a technical recession successfully. Still, the economic situation in Europe remains unstable and forces the European Central Bank (ECB) to consider reducing interest rates sooner to prevent a severe economic slump. Thus, the market expects a 25 basis point rate reduction by April. Meanwhile, US data indicated an unexpected rise in job openings in December and strong consumer confidence, decreasing chances that the Federal Reserve (Fed) will start easing monetary policy in Q1. As a result, the divergence between US and eurozone monetary policies favours the US dollar, at least in the short term.
EUR/USD fell sharply in the early European session as investors anticipated key reports. Today, traders should prepare for increased volatility as the macroeconomic calendar is full of important events. In Europe, the main focus will be on data from Germany: Retail Sales, Unemployment Rate, and Consumer Price Index (CPI) reports released at 7:00 a.m., 8:55 a.m. and 1:00 p.m. UTC. Reports will determine the overall sentiment in Europe. Moreover, the US ADP Employment Change at 1:15 p.m. UTC and the Fed's Interest Rate Decision at 7:00 p.m. UTC will move the market. If the Fed sounds hawkish and suggests it's too soon to cut interest rates, EUR/USD will continue to move down—possibly towards last year's December low of 1.07300. However, if the Fed sound dovish and investors' confidence in the rate cut in March increases, EUR/USD may rebound towards 1.09000.
USD/JPY remains within a tight range ahead of the Fed statement
The Japanese yen (JPY) lowered on Tuesday, but the drop wasn't deep as the US dollar weakened slightly despite better-than-expected labour market statistics.
The sentiment in USD/JPY remains mixed. On the one hand, financial markets think the chances of a rate cut by the Federal Reserve (Fed) in March are well below 50%, which is exerting upward pressure on the US dollar. On the other hand, investors continue to believe that the Bank of Japan (BOJ) will end its ultra-loose monetary policy in 2024 and are pricing in the first 25 basis points rate hike in July. Still, USD/JPY continues to move sideways without any clear trend as traders hope to see more clues on the future path of interest rates, particularly from the Fed.
USD/JPY increased slightly in the Asian and early European trading sessions. All eyes will be on the Fed's rate decision today at 7:00 p.m. UTC. The market expects the US central bank to leave the interest rate unchanged, but investors will focus on any clues from the post-meeting statement and Fed Chairman Jerome Powell's speech on the likelihood of a rate cut in March. USD/JPY will almost certainly break out of its tight 146.700–148.800 trading range after the Fed decision and the press conference. Hawkish details or comments, signalling the rate cut may be postponed, will lead to an upward break, and USD/JPY may reach 150.000. If the conference has a dovish tone, suggesting that the rate cut is needed, the pair will drop and may potentially test the 145.000 level.