XAU/USD Drops Below 2,000 for the First Time in 2 Months
The US Dollar Index (DXY) rallied sharply and reached a 3-month high on Tuesday, while the gold price plunged.
The price of gold fell below the crucial level of 2,000 for the first time since the beginning of 2024 after the US inflation report showed increasing Consumer Price Index (CPI) numbers, reducing hopes for an early interest rate cut by the Federal Reserve (Fed). 'That was not the report that the market wanted to see. Surprisingly stubborn inflation has dropped the chances of a May rate cut to under 50% for the moment,' said Tai Wong, the New York-based independent metals analyst. Indeed, the latest inflation figures make it more likely that Fed policymakers won't reduce interest rates until June. High-interest rates increase the opportunity cost of holding gold. Therefore, if interest rates remain high, XAU/USD will face downward pressure.
XAU/USD was essentially unchanged during the Asian and early European trading sessions. Today, no major events on the economic calendar could potentially reverse or extend the new bearish trend in XAU/USD. Traders will be waiting to see how the US Retail Sales report on Thursday and the Producer Price Index report on Friday may shape interest rate expectations. Currently, the technical bias remains bearish as gold trades below the pivotal 2,000 mark.
EUR/USD Drops to a 3-Month Low After the US Inflation Data Release
The euro (EUR) lost almost 0.6% on Tuesday after the US data showed that inflation rose more than expected in January. The report fuelled expectations that the Federal Reserve (Fed) will hold interest rates steady in March and May.
Yesterday's data showed that the US Consumer Price Index (CPI) rose by 0.3% month-on-month in January, above the 0.2% increase expected by economists polled by Reuters. Likewise, the increase in the core CPI was higher than expected, immediately reducing the probability of an imminent interest rate cut by the Fed. Currently, the market has completely priced out the chance of a 25 basis point (bps) rate cut in March, considering only a 37% chance of a 25 bps cut in May.
The key message from today's CPI is that it's slowing but less than expected. The reading supports the Fed's decision to continue to wait for more assurance that inflation is well contained,' said Dec Mullarkey, the managing director at SLC Management. Investors' long-term interest rate expectations have also shifted. According to the interest rate swap market data, traders expect only 90 bps worth of rate cuts by the Fed and almost 110 bps worth of rate cuts by the European Central Bank in 2024. As a result, the divergence in monetary policy expectations exerts downward pressure on EUR/USD.
EUR/USD was attempting to recover during the Asian and early European trading sessions. Today, traders will probably continue to digest yesterday's data, so the established bearish trend might continue. Additional volatility may be triggered by the release of eurozone Gross Domestic Product figures at 10:00 a.m. UTC. If the numbers are lower than expected, the decline in EUR/USD might deepen, pushing the pair below 1.07000. Otherwise, the pair may rebound, targeting the 1.07600 area.
AUD Plunged Sharply Due to Higher-Than-Expected US Inflation Data
The Australian dollar (AUD) plunged by 1.8% on Tuesday as the US Dollar Index (DXY) surged to a 3-month high on a higher-than-expected US Consumer Price Index (CPI) report.
Tuesday's US inflation report surprised the market, significantly shifting investors' expectations for the US interest rate path. The Australian dollar, being a highly risk-sensitive currency, suffered the most among the major currencies. The market no longer expects the Federal Reserve (Fed) to deliver a rate cut this spring. Instead, investors are pricing in a near 50% probability of a 25 basis point (bps) rate reduction in June. Still, the Reserve Bank of Australia (RBA) seems even less dovish than the Fed. According to interest rate swap market data, the market expects only 24 bps worth of rate cuts by the RBA in 2024. Thus, the sell-off in AUD/USD appears overextended as the divergence in monetary policy expectations between the Fed and RBA favours the AUD.
AUD/USD rose strongly during the Asian and early European sessions but remained below the important 0.65000 level. Today, the economic calendar is uneventful for AUD/USD, so the pair may stay under bearish pressure as long as it moves below 0.65000. However, the release of the Australian Labour Force Survey at 12:30 a.m. UTC tomorrow may stoke extra volatility in AUD pairs. 'The RBA will be hoping to see some softness in the Australian employment data tomorrow, given that a tight labour market remains a source of inflationary pressure,' said Tim Waterer, the chief market analyst at KCM Trade. If the labour report is weaker than expected, AUD/USD will probably continue to decline, but 0.64400 will offer strong support. Conversely, higher-than-expected employment figures may push the pair above 0.65000.