Gold Fell by More Than 1% After Hawkish Comments From a Fed Official
The gold (XAU) price plunged by 1.31% on Tuesday as the US dollar and US Treasury yields rose, following hawkish comments from Federal Reserve (Fed) Governor Christopher Waller about the US interest rate path.
Waller said that the US is close to achieving the Fed's inflation target of 2% but emphasized caution against early rate cuts until inflation is persistently low. The Fed is expected to maintain its policy rate at the 30 – 31 January meeting. However, the market forecasts a 61% chance of a rate decrease in March, according to the CME Fedwatch tool. 'Strong gains in the US dollar index are pressuring the gold market as well as a rise in US Treasury yields today on this first day back from the three-day holiday weekend,' mentioned Jim Wyckoff, the senior analyst at Kitco Metals. He also pointed out that 'one could argue that losses in gold are not bad compared to how strong the dollar is as tensions in the Middle East are keeping a floor under the prices.' The US Dollar Index rose nearly 1% to its highest point in over a month, diminishing gold's appeal to holders of other currencies.
During the Asian trading session, XAU/USD rose but then declined in the early hours of the European session. Today, traders' attention is on the release of the US Retail Sales at 1:30 p.m. UTC. If core sales figures are lower than expected, XAU/USD may rise above 2,040. However, if the data exceeds the forecast, the bullish trend in gold may reverse. 'Spot gold may break weak support of $2,024 per ounce and revisit 11 January low of $2,013.14,' said Reuters analyst Wang Tao.
EUR/USD Drops to a 1-Month Low as Investors' Expectations of a Rate Cut in March Decrease
The euro (EUR) fell by 0.68% on Tuesday as the US Dollar Index (DXY) rallied to a 1-month high after Federal Reserve (Fed) Governor Christopher Waller's hawkish comments.
Waller said there's no reason to move as quickly as they have in the past, cuts should be methodical and careful,' said Marc Chandler, the chief market strategist at Bannockburn Global Forex. The market immediately interpreted the remarks as hawkish and readjusted its interest rate expectations. According to the CME FedWatch tool, investors are currently pricing in a 61% chance of a rate decrease in March, while the probability was around 70% yesterday. Still, traders expect roughly 150 basis points (bps) worth of cuts from the Fed before the end of 2024, according to interest rate swap market data. Goldman Sachs said in a note that they haven't changed their view that the Fed will deliver three consecutive rate cuts beginning in March. However, Waller's comments increased the risk that the central bank would start decreasing the interest rate later or might prefer to cut once per quarter.
Meanwhile, European Central Bank (ECB) policymakers continue to give mixed signals. For example, French central bank chief Francois Villeroy de Galhau said, 'Our next move will be a cut, probably this year. I will not comment on the season.' At the same time, ECB board member Isabel Schnabel and German central bank chief Joachim Nagel said it's too early to discuss rate cuts. These contradictory views make it difficult for markets to understand the ECB's future monetary policy. Thus, investors' views have been shifting sharply in recent weeks, resulting in increased volatility in EUR pairs.
EUR/USD was falling during Asian and early European trading sessions. Traders will get insights into the ECB's interest rate path when Christine Lagarde, the ECB President, delivers her speech today at 3:15 p.m. UTC. Until then, EUR/USD may continue to move downwards, and the volatility may rise when the US Retail Sales report is released at 1:30 p.m. UTC. If the report shows higher-than-expected consumer spending in December, the bearish trend in EUR/USD may accelerate. Otherwise, the downward EUR/USD movement may pause or even reverse.
Hawkish Fed and Disappointing Chinese Data Weakened the Australian Dollar
The Australian dollar (AUD) lost 1.16% on Tuesday as hawkish comments from a Federal Reserve (Fed) official pushed the US dollar higher.
AUD pairs are sensitive to risk sentiment and react strongly to changes in expectations of US monetary policy. Yesterday, the outlook on the US interest rate path turned less dovish after Fed Governor Christopher Waller didn't explicitly opt for a rate cut in March. As a result, AUD/USD dropped below the critical 0.66000 level. Also, the Australian economy is highly exposed to the Chinese economy, and Chinese economic releases noticeably impact the Aussie exchange rate. Earlier today, official data showed that China's economy increased in Q4 by 5.2%—below the market's expectations. The data put additional downward pressure on AUD/USD.
Fundamentally, the market expects the Fed to cut rates more aggressively than the Reserve Bank of Australia (RBA). Currently, interest rate swap market data indicate that traders price in around 150 basis points (bps) worth of rate cuts from the Fed and only 40 bps of cuts from the RBA in 2024. The divergence in monetary policies between central banks favors the Australian dollar in the long term. Today, traders should watch the release of the US retail sales data at 1:30 p.m. UTC. If the figures are lower than expected, the short-term bearish trend in AUD may pause. However, better-than-expected consumer spending figures will likely pull AUD/USD below 0.65200.