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Gold Holds Steady on Rate Cut Expectations; Euro Rises Due to Strong PMI Figures

Published 05/07/2024, 04:46 AM
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Gold Holds Steady On US Rate Cut Expectations and Middle East Tensions

Gold (XAU) traded bullish on Monday and gained 0.92%, supported by expectations that the US Federal Reserve (Fed) will cut interest rates this year. Also, uncertain perspectives of a ceasefire between Hamas and Israel supported the strong demand for safe-haven assets. Eventually, gold reached 2,330 and now moves within the 2,320–2,330 range.

The last Nonfarm Payroll report indicated that US employment growth in April was slower than expected.  

"Gold has been slowly building a base for the past week, to show demand sits around $2,280. The Fed continues to make noise about the next move likely to be lower, and that's certainly helped shake a few bears out at these lows", said City Index senior analyst Matt Simpson.

The president of the New York Fed, John Williams, said yesterday that the regulator would eventually lower interest rates, but it's unclear when this will happen. Market participants are now pricing in a 67% chance of a rate reduction by the Fed in September, according to the CME FedWatch Tool. Traders also closely monitored the recent escalation in the Middle East. 'Concerns that the ceasefire in Gaza may collapse' have also contributed to the rise in XAU/USD, Simpson added.

With weakening US economic data, the Fed plans to begin lowering the base rate, and a downward trend in the US dollar, precious metals appear bullish. However, given the significant rally in XAU/USD this year and its separation from fundamental factors, it would not be surprising if gold continued to decrease or trade sideways. Volatility in the US dollar is likely to remain low until the release of the April Consumer Price Index (CPI) on 15 May. Any surprises in the report could alter market sentiment and trigger significant price movements.

XAU/USD was moving sideways within the 2,320–2,330 range during the Asian and early European trading sessions. Today's economic calendar is relatively light. Overall, the main driver for XAU/USD will be geopolitical developments. Key levels to watch are 2,300 and 2,330.

Euro Surged Slightly Due to Strong PMI Figures

The euro (EUR) rose slightly on Monday, bolstered by the final eurozone Composite Purchasing Managers' Index (PMI) figures. PMI numbers grew at the fastest pace in nearly a year, primarily driven by the services sector despite a slowdown in manufacturing activity.

In a recent Bloomberg report, the European Central Bank (ECB) Chief Economist Philip Lane expressed increased confidence that eurozone inflation is on track to meet the 2% target, according to recent economic data. This optimism enhances the prospects of an interest rate cut by the ECB as soon as June. In an interview with the Spanish newspaper El Confidencial, Philip Lane discussed recent consumer price data that has been showing easing pressures in the service sector since November. He described this as 'an important initial step in the next phase of bringing inflation down'.

On Monday, Bloomberg reported that Richmond Federal Reserve (Fed) President Thomas Barkin said that high US interest rates are expected to slow economic growth, bringing inflation closer to the Fed target of 2%. The release of weaker-than-expected US labor data on Friday has revived expectations of rate cuts by the central bank this year. Thus, investors' risk appetite has increased, weakening the US dollar and pushing the euro higher.

EUR/USD decreased in the Asian trading session. Traders now await the eurozone Retail Sales report at 9:00 a.m. UTC today. Higher-than-expected figures may strengthen the euro. However, a weak report will exert downward pressure on EUR/USD and may pull the pair towards 1.07500.

Japanese Yen Is Rising Again as the Market Opposes the BOJ

The Japanese yen lost 0.58% against the US dollar on Monday due to a technical correction.

Last week's probable interventions by the Japanese authorities pushed USD/JPY to a one-month low, but traders have since resumed selling the yen. According to Reuters, traders estimate that the Bank of Japan (BOJ) spent nearly $59 billion protecting the currency from depreciation last week. However, the market still views the selling opportunity in the Japanese yen.

"Nothing's actually changed. I think this has provided a momentary pause in what will inevitably be tested by markets again, who will see this as free money when they take on the BOJ", said Rob Carnell, the head of Asia-Pacific research at ING.

In other words, the BOJ seems to have set itself up for a protracted war with a market that views USD/JPY as predominantly bullish.

"Because of the wide rate differentials, speculators will still be on the other side of this trade", said Kaspar Hense, the senior portfolio manager at BlueBay Asset Management.

Overall, possible future interventions make it very hard to predict the movements of the currency.

USD/JPY was rising during the Asian and early European trading sessions. Masato Kanda, the Japanese government's top currency diplomat, said earlier today that Japan would 'take action against any disorderly, speculative-driven foreign exchange moves'. Although traders believe that the Japanese government did intervene in the currency market last week, there has been no official confirmation. Thus, the possibility of future interventions is unclear.

"Japan is reluctant to intervene in the currency market considering its limited available dollar cash reserves and US Treasury Secretary Janet Yellen's comments that such moves were acceptable only in rare circumstances", said Hideo Kumano, the chief economist at Dai-ichi Life Research Institute.

Fundamentally, a weaker Japanese yen is a problem for the authorities because it increases the costs of imports and inflation. Today, the macroeconomic calendar is relatively uneventful for the USD/JPY, so the short-term bullish trend in the pair may continue despite resistance in 154.500–155.000.

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