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Gold Rises as US Dollar Drops; EUR/USD Rises Above 1.07500

Published 02/07/2024, 05:11 AM
Updated 02/20/2024, 03:00 AM

Gold Rises as the Rally in the US Dollar Slows

Gold (XAU) increased by 0.53% on Tuesday as the US dollar and Treasury yields retreated.

Unexpectedly robust US employment and services sector data and Federal Reserve (Fed) chair Jerome Powell's hawkish comments have decreased the likelihood of interest rate reductions. As a result, the US Dollar Index continues to move near multi-month highs even after yesterday's minor pullback. In a recent interview, Powell echoed his previous statement, suggesting that a rate cut in March is unlikely. He also mentioned that the central bank plans to proceed with rate cuts more gradually than the market predicts.

XAU/USD was essentially unchanged in Asian and early European trading sessions. There are no major data releases today, but Fed officials' speeches might clarify future US monetary policy. If speeches support Jerome Powell's rather hawkish stance, XAU/USD may decline towards 2,024. Otherwise, gold may strengthen. 'Spot gold may retrace to $2,029 per ounce as it failed to break resistance at $2,038,' said Reuters analyst Wang Tao.

EUR/USD Rises Above 1.07500, but the Bearish Trend Persists

The euro (EUR) gained 0.12% on Tuesday as the US Dollar Index (DXY) corrected after a strong 2-day rally.

Still, EUR/USD continues to trade near multi-month lows as strong US macroeconomic data and hawkish comments from Federal Reserve (Fed) officials bolster the US dollar. Loretta Mester, president of the Cleveland Fed, said she couldn't provide the exact timing of rate cuts amid ongoing inflation uncertainty. Thus, the market's expectations for an interest rate cut in May continue to slide. Now, investors price in only a 54% chance of a 25 basis point rate reduction in May. At the same time, the likelihood of a rate cut in the eurozone is also decreasing. Boris Vujcic, Croatia's central bank governor, told Reuters that the European Central Bank (ECB) doesn't need to rush cutting rates, arguing that the 'equilibrium' rate in Europe is higher than it used to be.

EUR/USD was rising slightly in the Asian and European trading sessions. The macroeconomic calendar is uneventful today, so the pair will likely move within the established trend. However, the upcoming speeches by Fed officials could shed some light on the future path of US interest rates and spur some volatility in all USD pairs. Adriana Kugler and Michelle Bowman, members of the Fed Board of Governors, and Tom Barkin, the president of Richmond Fed, will have speeches at 4:00 p.m., 7:00 p.m., and 5:30 p.m. UTC. If they give hawkish messages, the bearish trend in EUR/USD might resume, potentially taking the pair below the important 1.07000 level. Meanwhile, a dovish message may trigger a short-term rally towards 1.08000.

The Australian Dollar Rises as RBA Keeps Interest Rates Steady

Despite dropping below 0.65000 against the US dollar, the Australian dollar (AUD) recovered and gained 0.63% on Tuesday.

As expected, the Reserve Bank of Australia (RBA) kept its base interest rate unchanged on Tuesday. However, the regulator said a further increase is possible, given that inflation is still too high. Australia's cash rate has remained steady at a 12-year high of 4.35% since November 2023.

"It totally makes sense for the RBA to retain hawkish bias, given the pushback to easing expectations we have seen lately from the Fed, the ECB, and other major central banks," said Charu Chanana, a head of currency strategy at Saxo Bank in Singapore.

According to the interest rate swap market data, investors consider the RBA one of the least dovish central banks among the G7 countries. The market expects only around 50 basis points (bps) worth of rate cuts in 2024. Thus, AUD/USD may continue rising, potentially targeting a 0.67000 area.

AUD/USD was rising slightly in the Asian and European trading sessions. Today, the macroeconomic calendar is light, so the pair's short-term bullish trend may continue. However, traders should be careful as the upcoming speeches by Fed officials could give more details on the path of US interest rates and spur some volatility in USD pairs. Adriana Kugler and Michelle Bowman, members of the Fed Board of Governors, and Tom Barkin, the president of Richmond Fed, will have speeches at 4:00 p.m., 7:00 p.m., and 5:30 p.m. UTC, respectively. Hawkish messages may resume the bearish trend in AUD/USD, potentially taking the pair below the important 0.65000 level. Otherwise, the pair may face a short-term rally towards 0.66000.

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