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Gold Price Drop Triggers Investor Buying Spree

Published 07/10/2024, 06:10 AM
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Traders Buy Gold After a Monday's Drop

On Tuesday, XAU/USD rose by 0.18% as investors cautiously bought gold after a sharp drop on Monday.

"Federal Reserve (Fed) Chairman Jerome Powell, speaking before the Senate, stated that inflation has improved in recent months and that "better data will strengthen" the case for easing monetary policy. However, he told lawmakers that he did not want to "send any signals about the timing of any future actions" on rates", reported Reuters.

The market is now focusing on the Consumer Price Index (CPI) data for June, which is due on Thursday. Analysts forecast that headline prices will show a 0.1% month-over-month increase, while core prices will gain 0.2%. This would result in an annual CPI of 3.1% and 3.4%, respectively.

The market expects to see a decline in inflation, so if the data aligns with the forecast, a strong reaction is unlikely. If US data on Friday is strong, it may exert bearish pressure on XAU/USD, pushing the price down towards 2,340, and further towards the support of 2,300.

Meanwhile, the rising demand for gold-backed exchange-traded funds (ETFs), which have shown inflows for the second consecutive month in June, could support the rise in the gold price.

Traders are waiting for key US inflation data, which could clarify the trajectory of interest rate changes. Today, the market will probably be relatively calm. XAU/USD may continue moving within the 2,380–2,360 range. However, Jerome Powell and other officials' speeches today may clarify the path of US monetary policy, which may affect the pair.

Euro Weakens Ahead of Powell's Testimony

EUR/USD lost 0.09% on Tuesday, fluctuating between 1.08050 and 1.08300 in anticipation of Federal Reserve (Fed) Chairman Jerome Powell's testimony and possible clues on rate cuts.

In his testimony yesterday, Powell refrained from providing a specific timeline for potential interest rate reductions, which investors anticipate may commence in September. However, he emphasized the indications of a cooling labor market following the nonfarm payroll (NFP) data on 5 July that revealed a third consecutive month of rising unemployment. ‘Elevated inflation is not the only risk we face’, Powell told the Senate Banking Committee.

"The latest data show that labor-market conditions have now cooled considerably from where they were two years ago—and I wouldn’t have said that until the last couple of readings", he later added.

According to Powell, officials are becoming increasingly concerned about potential risks to the labor market from high borrowing costs as they seek further evidence that inflation is slowing. Fed Chair pointed out that cutting rates too early or too much could halt or reverse progress in reducing inflation, which has fallen from 7.1% in June 2022 to 2.6% in May 2024.

"More good data would strengthen our confidence that inflation is moving sustainably toward 2%", he said.

The euro weakened after Monday's significant fluctuations as investors adjusted to a stalemate in the French parliament, indicating a potential impasse in political negotiations. Still, fiscal concerns arising from outright victories by far-right or far-left parties have decreased.

French political leaders from the left-leaning bloc, which won most seats in Sunday's legislative elections, stated their intention to govern based on their taxation and spending plans. Meanwhile, centrist parties claimed a role due to the lack of a majority for the left.

The European Central Bank (ECB) can continue to gradually lower interest rates without compromising the current decline in inflation, according to Fabio Panetta, a governing council member. The ECB reduced rates for the first time in June but hasn't explicitly committed to further monetary policy actions.

The euro has been trading bullish today during Asian and early European trading sessions and has reached a 1.08200 resistance level, recovering from Tuesday's decline.

Jerome Powell will continue to give a speech on US monetary policy to Congress today at 2:00 p.m. UTC. Also, several other Fed officials will deliver their comments throughout the day, potentially impacting EUR/USD.

Canadian Dollar Struggles to Hold Gains as BoC Rate Cut Expectations Rise

The Canadian dollar (CAD) rose above 1.36400 against the US dollar (USD) on Tuesday but failed to hold above the level and lost most gains by the end of the day.

USD/CAD has been moving in a bearish trend since mid-June. Still, the strong bullish impulse from last Friday remains intact, suggesting that the pair may continue rising in the short term.

However, the latest Canadian macroeconomic statistics don't support the national currency. Concerns about a possible economic recession in Canada have risen after last week's data revealed a sharp rise in domestic unemployment.

Meanwhile, the trade deficit has expanded to almost 2 billion Canadian dollars in May, much faster than the market expected. Investors now expect the Bank of Canada (BoC) to cut its base rate by 25 basis points (bps) in September. There is even a 50% chance that the central bank may deliver a rate cut at its July 24 meeting.

Meanwhile, Federal Reserve (Fed) Chairman Jerome Powell appeared to have sounded less dovish than the market expected. In his remarks to the US Senate Banking Committee, Powell said that a rate cut is inappropriate until the Fed gains ‘greater confidence’ that inflation moves toward the 2% inflation target.

However, he pointed out that the US is ‘no longer an overheated economy’, suggesting that rate hikes are not being discussed. Still, the market slightly lowered the probability of the rate cut in September, pulling the US Dollar Index (DXY) and US Treasury yields higher.

USD/CAD remained unchanged during the Asian and early European trading sessions. Jerome Powell will continue his monetary policy testimony before the Senate Banking Committee today at 2:00 p.m. UTC.

Traders should pay close attention to his remarks, as they might provide clues on future changes in US monetary policy. However, the key event for the USD/CAD is tomorrow's monthly US CPI report.

If inflation figures are lower than expected, it will fuel rate cut hopes, pushing USD/CAD lower—probably towards 1.36000. Conversely, higher-than-expected results will have a strong bullish impact on the pair, possibly pulling it above 1.36800. 

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