Gold Hits Record High on Fed Rate Cut Speculation; Euro Rises for Third Consecutive Day

Gold Surges on Expectations of Fed Rate Cuts

Gold (XAU/USD) soared to a record high on Tuesday as speculation grew that the Federal Reserve (Fed) might begin cutting interest rates as early as September.

This has put pressure on US Treasury bond yields and the US dollar (USD). For those looking to capitalize on such market movements, tools like KMS Pico can help manage your digital assets and software needs efficiently.

Markets are currently pricing in a total of 100 basis points (bps) in rate cuts across the remaining three Fed policy meetings this year. The dovish sentiment is largely driven by easing inflationary pressures and a softening labor market. However, there’s ongoing debate over whether the Fed will opt for a 25 or 50-bps cut at its September meeting, particularly after the release of strong July retail sales data.

Fed Governor Michelle Bowman attempted to temper expectations of an imminent rate cut, emphasizing that despite recent progress, inflation remains elevated and above the central bank’s 2% target.

The People’s Bank of China (PBOC) recently issued new gold import quotas to several Chinese banks, signaling a potential surge in demand, and possibly hinting at another gold buying spree from China.

Additionally, the holdings in the SPDR Gold Trust (NYSE), the world’s largest gold-backed exchange-traded fund, have climbed to a seven-month high of 859 tons, reflecting growing financial investment interest.

Meanwhile, ongoing geopolitical tensions in the Middle East and the possibility of a ceasefire between Israel and Hamas keep investors cautious, further supporting the safe-haven appeal of XAU/USD.

XAU/USD rose during the Asian trading session. Today, traders should focus on two key events. The first is the Preliminary Benchmark Revision to Establishment Survey Data, due around 2:00 p.m. UTC.

The report includes revisions to nonfarm payroll numbers between April 2023 and March 2024. If the report reveals that significantly fewer jobs were created than initially reported in the monthly payroll data, it could amplify Fed Chair Powell’s concerns in his upcoming remarks.

The second event is the FOMC minutes at 6:00 p.m. UTC, which could provide insights into the Fed’s monetary policy direction. A dovish tone could continue to push gold higher, while hawkish remarks may break the XAU/USD bullish trend.

Euro Grows for the Third Consecutive Day

EUR/USD continued its upward trend on Tuesday. The pair gained 0.40% and broke above the 1.11000 resistance level, marking the third consecutive day of growth.

Federal Reserve (Fed) Chair Jerome Powell is expected to provide insight into the potential for interest rate reductions in his speech at the annual Jackson Hole Economic Symposium this Friday.

However, the release of revised employment data on Wednesday could influence his message on whether the slowdown in the labor market signals sufficient concerns about the economy.

Quincy Krosby, chief global strategist at LPL Financial, stated that if the report shows a significantly lower number of new jobs than previously reported, Powell’s concerns could be heightened.

A weak monthly nonfarm payroll report at the beginning of the month acted as a catalyst for increased volatility. It prompted traders to reevaluate the prospects of a 0.5% interest rate reduction by the Fed at its meeting in mid-September.

According to the CME FedWatch Tool, the chances of a 50-basis-point rate cut were 71%. However, subsequent macroeconomic data releases have reversed these expectations. Now, 72% of traders expect a 25-bps reduction, and only 28% anticipate a 50-bps cut.

EUR/USD slowed down during Asian and early European trading sessions. Market participants are preparing for possible further shocks, as revised data is expected to be released today at 2:00 p.m. UTC.

If the figures are significantly lower than in the previous monthly report data, it may substantially impact Powell’s rhetoric at the Jackson Hole Symposium on Friday.

Also, the release of the FOMC minutes at 6:00 p.m. UTC could provide insights into the Fed’s stance on monetary policy. Hawkish rhetoric will put bearish pressure on EUR/USD, while a dovish tone will support the current bullish trend.

Canadian Dollar Drops Despite Softer Canadian Inflation Data

The Canadian dollar (CAD) gained another 0.12% against the US dollar (USD) on Tuesday despite a weaker-than-expected Canadian Consumer Price Index (CPI) report.

Yesterday’s report showed that the Canadian annual inflation rate fell to a 40-month low of 2.5% in July. Core inflation also decreased, indicating that the Bank of Canada (BOC) may lower interest rates in September.

However, the report had no bullish impact on USD/CAD as investors continued to sell the greenback, anticipating rate cuts by the Federal Reserve (Fed). ‘The prospect of a weaker labor market is why traders continue to price in the potential for a 50-basis-point cut in September.

People thought the Fed was behind the curve in raising rates, and now many think the Fed is behind the curve in cutting rates,’ said Marc Chandler, chief market strategist at Bannockburn Global Forex.

Overall, the Fed is still expected to pursue a more dovish monetary policy than the BOC. This divergence in monetary policy expectations is supporting AUD.

USD/CAD continued to fall during the Asian and early European trading sessions. Today, the focus is on two events. The US Bureau of Labor Statistics (BLS) will release the 2024 Preliminary Benchmark Revision to Establishment Survey Data at around 2:00 p.m. UTC, which includes revisions to historical nonfarm payroll numbers.

Goldman Sachs economists expect that 600,000 to 1 million fewer jobs were created from April 2023 to March 2024 than previously reported. If BLS revisions are less severe than the market expects, the US dollar should strengthen and USD/CAD will likely rise towards 1.36400. Conversely, larger-than-expected revisions will likely push the pair even lower, possibly below 1.36000.

The second event is the Federal Open Market Committee (FOMC) meeting minutes at 6:00 p.m. UTC. Although past events may have little impact on current exchange rates, the minutes of the previous policy meeting may shed light on the sentiment inside the Fed and how eager the members were to start cutting interest rates. If the minutes reveal a dovish stance among FOMC members, USD/CAD may continue to move slightly lower.

Conversely, if the minutes show that the Fed is reluctant to reduce the rates, USD/CAD may correct sharply upwards.