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Gold Prices Drop; EUR/USD Rises on Divergent Fed and ECB Monetary Policies

Published 02/27/2024, 04:45 AM
Updated 02/20/2024, 03:00 AM

Today's US Data May Reverse Or Prolong the Short-Term Bullish XAU/USD Trend

The gold (XAU) price dropped by 0.25% on Monday as bulls closed their long positions due to the strong resistance in the 2,040 area.

Despite a minor pullback yesterday, strong safe-haven flows due to continuing tensions in the Middle East support the precious metals market. Still, traders' attention is shifting towards the US inflation data due this week, which could clarify the timing of interest rate cuts by the Federal Reserve (Fed). The Fed's preferred measure of inflation, the US Personal Consumption Expenditure (PCE) Price Index, will be released on Thursday. 'If the PCE data comes a little warmer, then it will be bearish for the metals, but gold will maintain the $2,000 range. For it to push below that, economic data this week has to be surprisingly hot,' said Jim Wyckoff, the senior analyst at Kitco Metal. Overall, the market expects economic data to be strong as interest rate expectations remain hawkish. According to the CME FedWatch Tool, the market doesn't anticipate any rate cuts by the Fed in either March or May and is currently pricing in a 52% chance of a 25 basis point reduction in June.

XAU/USD was rising during the Asian and early European trading sessions. Today, a string of US macroeconomic reports may potentially trigger some volatility and impact short-term interest rate expectations in case of a big surprise. The Durable Goods Orders report will be released at 1:30 p.m. UTC, followed by CB Consumer Confidence and Richmond Manufacturing Index data at 3:00 p.m. If the reports reveal the US economy remains strong with business activity expanding and consumers remaining optimistic, then the price of gold may drop sharply, possibly below 2,020. Otherwise, the bullish trend in XAU/USD will likely continue. 'Spot gold may retest support at $2,025 per ounce. A break below could be followed by a drop to $2,015,' said Reuters analyst Wang Tao.

Divergence in ECB and Fed Monetary Policies Decreases, Pushing EUR/USD Higher

The euro increased by 0.18% on Monday, marking its weekly rise.

The euro's strength is largely attributed to the diminishing difference in the anticipated interest rate path between the US and the eurozone. Two weeks prior, the market was pricing in a rate cut of approximately 80 basis points (bps) by the Federal Reserve (Fed) against about 100 bps from the European Central Bank (ECB) by the year's end. However, by Monday, this difference nearly vanished.

The ECB President Christine Lagarde said yesterday at the debate in the European Parliament: 'Wage growth is expected to become an increasingly important driver of inflation dynamics in the coming quarters.' She also noted: 'At the same time, the contribution of profits is declining, suggesting that as expected, labor cost increases are partly buffered by profits and are not being fully passed on to consumers.'

EUR/USD remained relatively flat during the Asian and early European sessions. Today's events will likely stoke extra volatility in the euro. Traders should focus on two reports: US Durable Goods Orders at 1:30 p.m. UTC and US CB Consumer Confidence at 3:00 p.m. UTC. If the figures indicate continued weaknesses in the US economy—below-normal goods orders or declining consumer confidence—it will increase the probability of imminent rate cuts by the Fed, pushing EUR/USD higher. However, EUR/USD may correct downwards sharply if the reports are better than expected.

AUD/USD Declines Ahead Of US Reports and Australian Inflation Data

The Australian dollar (AUD) lost 0.3% on Monday despite a minor US Dollar Index (DXY) drop.

AUD/USD faced technicals-based selling pressure as it approached a strong 0.66000 resistance area. Furthermore, continued instability in the Red Sea region may have slightly increased risk-off flows into the US dollar. The interest rate differentials between Australia and the US continue to support the US dollar. However, traders still expect the Federal Reserve (Fed) to ease its macroeconomic policy faster than the Reserve Bank of Australia (RBA) in the future. According to interest rate swap market data, traders price in roughly 80 basis points (bps) worth of rate cuts by the Fed compared to just over 30 bps reductions by the RBA in 2024. Relative monetary policy expectations are probably the most important factor affecting AUD/USD's exchange rate. Therefore, traders should pay close attention to the incoming data.

AUD/USD was rising slightly during the Asian and early European trading sessions. Today, traders should focus on the US reports: Durable Goods Orders at 1:30 p.m. UTC and CB Consumer Confidence at 3:00 p.m. UTC. Stronger-than-expected reports, showing an increase in business activity and consumer spending, might have a strong bearish impact on AUD/USD, potentially pushing the pair below 0.65000. However, AUD/USD may finally break above the critical 0.66000 level on the back of weaker-than-expected data.

Also, Australian inflation data will come out on 28 February at 12:30 a.m. UTC. The market expects the weighted Consumer Price Index (CPI) to increase to 3.6% in January. The expectations are set quite high, and if the report reveals an even stronger growth in consumer prices, the RBA may be forced to consider another interest rate hike. Thus, AUD/USD will almost certainly rally above 0.66000. Conversely, if the inflation figures come out below or in line with the expectations, AUD/USD may slightly decline.

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