The Gold Price Stays High Despite a Hawkish Message From the Fed
The gold (XAU) price rose above 2,050 on Wednesday but failed to hold the level and decreased after Jerome Powell, the Federal Reserve (Fed) Chair, said the rate cut in March was unlikely.
Yesterday, the US central bank left interest rates unchanged, but Powell pushed back strongly against expectations of a rate reduction in March. He stated that it wasn't the Fed's baseline scenario and that none of the Federal Open Market Committee (FOMC) members suggested cutting rates. He also added that the regulator needs more confidence in the inflation slowdown. Predictably, the Fed's hawkish message immediately lowered the probability of a 25 basis point (bps) rate reduction to less than 36% at the next meeting.
In theory, the US interest rate staying high for longer should exert bearish pressure on gold. Although XAU/USD lost most of its gains yesterday, it didn't sell off sharply and now continues to trade near 2-week highs. One possible reason the pair remained stable is that investors' long-term interest rate expectations remain predominantly dovish. The market continues to anticipate more than 140 bps worth of rate cuts from the Fed in 2024 and a 36% probability of a 50-bps rate reduction in May. Furthermore, yesterday's ADP Employment numbers were lower than expected, possibly strengthening the market's belief that the Fed may need to cut rates sooner rather than later.
XAU/USD was rising during the Asian and early European trading sessions. Today, gold traders should pay attention to US macroeconomic reports for any details contradicting or supporting the Fed's recent statement. The most important reports to watch are Jobless Claims at 1:30 p.m. UTC and ISM Manufacturing Purchasing Managers' Index (PMI) at 3:00 p.m. UTC. If reports come out stronger than expected—jobless claims rise only slightly, or PMI exceeds forecast—XAU/USD may drop sharply. Otherwise, the bullish trend in gold may continue.
"Spot gold may retest support at 2,032 USD per ounce. A break below could open the way towards the 2,019–2,024 USD range", said Reuters analyst Wang Tao.
EUR/USD Drops to a 2-Month Low as the Fed Promises No Rate Cut in March
The euro (EUR) declined by 0.23% yesterday and reached its lowest point since 13 December, following hawkish comments from Jerome Powell, Federal Reserve (Fed) Chair.
EUR/USD is heading for a 2.2% drop this month, recording its poorest monthly performance since September. The US dollar strengthened on Wednesday following Federal Reserve (Fed) Chair Jerome Powell's indication that a March rate cut is not on the cards. The Fed offered a more neutral stance on interest rates than anticipated by many investors. In a press conference, Jerome Powell mentioned that the regulator needs more data to ensure that the decelerating inflation data reflects the economic trend to proceed with rate reductions confidently. 'We do have confidence, but we want to get greater confidence', he stated.
Overall, Jerome Powell dismissed the possibility of an interest rate cut in March. Still, the US Dollar Index failed to set a new high. The likelihood of the March rate reduction now stands at less than 36%, a decrease from 73% a month earlier. Meanwhile, Wednesday's data revealed that inflation in Germany decreased to 3.1% in January due to a decline in energy prices. Soft economic growth and lower inflation figures from the eurozone could heighten expectations for soon monetary policy easing from the European Central Bank (ECB), potentially bringing EUR/USD lower.
EUR/USD was falling slightly during the early European trading session. Today, traders should pay attention to the eurozone Consumer Price Index (CPI) report at 10:00 a.m. UTC. If the data supports yesterday's German CPI report by being lower than expected, EUR/USD may plunge sharply—possibly towards 1.07500. However, higher-than-expected numbers may slightly support EUR bulls.
GBP/USD Is Breaking Out of Its Month-Long Trading Range
The British pound lost 0.09% on Wednesday as the US dollar strengthened after a hawkish statement from the Federal Reserve (Fed).
The US central bank almost completely excluded the possibility of a rate cut in March, which should have sharply brought GBP/USD down. However, the market was prepared for this outcome, so the reaction was relatively muted. Still, the sentiment in GBP/USD seems to be getting more bearish as the pair is breaking out of its month-long trading range. The focus now shifts towards the Bank of England's (BOE) policy rate decision later today. Fundamentally, the U.K. economy is less prepared for the rate cut because inflation is higher than in the US, above the 2% target. However, the sentiment within the Monetary Policy Committee (MPC), which determines the monetary policy path, may be shifting towards a more dovish stance. Three of the MPC's nine policymakers voted for a further rate increase in December, as a stagnant economy had failed to cool rapid wage growth. This time, their stance could be less hawkish.
GBP/USD was falling during the Asian and early European trading sessions. Today, GBP traders should expect increased volatility as the calendar is packed with many important releases. First, the BOE will declare its verdict on monetary policy at 12:00 p.m. UTC, followed by the press conference at 12:30 p.m. UTC. Traders should watch for any shifts in the regulator's tone in the monetary policy statement and MPC vote distribution. Later today, the US will release two important macroeconomic reports: Jobless Claims at 1:30 p.m. UTC and the ISM Manufacturing Purchasing Managers' Index (PMI) at 3:00 p.m. UTC. Weak reports might support the British pound, but only if the BOE decision doesn't surprise investors by being excessively dovish. Technically, GBP/USD will probably remain under bearish pressure until the price stays below the important 1.27000 level.