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Gold Rose on a Weaker US Dollar; Euro Rises Sharply on ECB Comments

Published 05/28/2024, 03:21 AM

Gold Rose on a Weaker US Dollar and Persisting Geopolitical Tensions

Gold (XAU) gained 0.72% on Monday as the US dollar (USD) weakened due to the US and U.K. bank holidays.

Last week's Federal Open Market Committee (FOMC) meeting minutes revealed that the monetary policy aims to maintain the current benchmark rate. Moreover, some Federal Reserve (Fed) officials' discussions hinted at possible further hikes. Traders are increasingly skeptical that the US central bank will lower rates more than once in 2024, with the CME FedWatch Tool indicating about a 62% chance of a rate cut by November.

Meanwhile, rising geopolitical risks in the Middle East bolstered precious metals' safe-haven appeal after reports of an Israeli airstrike in Rafah. Consequently, global leaders urged the enforcement of a World Court order to halt Israel's assault. Additionally, according to official data, China's net gold imports through Hong Kong fell by 38% in April compared to the previous month. Besides being an inflation hedge, gold is also in high demand during periods of geopolitical uncertainty or conflict. Thus, gold may still rise towards new highs if Middle East tensions continue to unfold.

XAU/USD moved sideways during the Asian and early European trading sessions. Today, the US Consumer Confidence report will be released at 2:00 p.m. UTC. Stronger-than-expected figures, indicating an increase in consumer spending, will likely decrease the probability of a rate cut by the Fed and put bearish pressure on XAU/USD. Conversely, weaker-than-expected figures may trigger a move upwards.

ECB Officials' Comments Support the Euro

The euro (EUR) rose slightly yesterday as the US dollar weakened.

EUR/USD rose by 0.08% on Monday as US markets were closed for the long holiday weekend. The market confidently expects the European Central Bank (ECB) to cut interest rates in June. Meanwhile, traders started to reconsider the possibility of rate cuts by the Federal Reserve (Fed) this year as officials have sounded quite hawkish lately. According to the CME FedWatch Tool, markets are now pricing in nearly a 50% chance of a 25-basis-point rate cut by the Fed in September, down significantly from over 68% a week ago.

The German IFO Business Climate Index missed expectations yesterday, coming in at 89.3 for May. The Current Economic Assessment Index also dropped from 88.9 in April towards 88.3, below the forecasted 89.9. The IFO Expectations Index, which reflects firms' projections for the next six months, rose towards 90.4 in May but still didn't reach the expected 90.5. However, the downbeat results of the German IFO survey didn't have much effect on EUR/USD.

EUR/USD rose sharply during the early European trading session following the speech of ECB policymaker Isabel Schnabel. She said that:

"QE may have weakened the transmission of monetary policy during the recent tightening cycle."

"In a bank-based economy, targeted longer-term refinancing operations can provide substantial support with a smaller footprint," she added.

The market perceived these statements as a signal that the ECB might change its strategy, pushing the euro up. Today, the US CB Consumer Confidence report will be released at 2:00 p.m. UTC. If figures indicate increased consumer spending, it will likely reduce the chances of a rate cut by the Fed and may trigger a correction in EUR/USD. Conversely, the euro may continue rising on weaker-than-expected numbers.

AUD/USD Seems Ready to Grow Further

AUD/USD rose by 0.4% on Monday, continuing its growth after last week's downward correction. The pair rose towards 0.66600 and may continue moving upwards as the bullish momentum is strong.

AUD/USD now has the chance to establish a firm bullish trend in the medium term. The Reserve Bank of Australia (RBA) doesn't plan to cut interest rates, which are currently at 4.35%, until May 2025.

"Today's data will keep the RBA confident they are making progress in reducing excess demand," said Taylor Nugent, senior economist at NAB.

"We see an improvement in real household income growth in the second half of the year, as wage growth outpaces the slowdown in inflation and is supported by income tax cuts," he added.

Thus, divergence in Australian and US monetary policies favors the Australian dollar (AUD). Easing geopolitical concerns and higher-than-expected inflation in Australia also support the national currency. Additionally, steady demand for non-ferrous metals can improve AUD trading conditions. Moreover, stronger data on the business activity index in China may become a driver for AUD/USD's exchange rate. Meanwhile, the US Dollar Index (DXY) started to decline despite hawkish comments from Federal Reserve officials, positively affecting AUD/USD.

Since the beginning of the year, AUD/USD has been moving sideways within the 0.64500–0.67000 range. Breaking this range will set the main trend for AUD/USD. Many factors indicate the pair may break above these levels and continue moving upwards. More data may provide additional details about the possible directions of the Australian dollar. The Australian Monthly Consumer Price Indicator (CPI) will be released on Wednesday and may prompt a change in RBA policy. Higher-than-expected figures may push AUD/USD higher, while weaker numbers may trigger a downward correction. Today's US CB Consumer Confidence report at 2:00 p.m. UTC may also cause above-normal volatility.

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