Gold Falls by 1% as US Dollar Strengthens

(XAU) dropped by 1% on Wednesday as the  (DXY) and Treasury yields strengthened ahead of the US inflation report.

The DXY strengthened by 0.5%, making dollar-priced bullion less attractive for holders of other currencies. Meanwhile, benchmark yields hovered near the multi-week highs reached in the previous session. XAU/USD has fallen by over 100 since reaching a record high of 2,450 on 20 May. The decrease happened due to hawkish remarks from Federal Reserve (Fed) officials, as the latest meeting minutes indicated that the path to the 2% inflation target will be longer than expected. Although bullion is considered an inflation hedge, higher interest rates increase the opportunity cost of holding the non-yielding asset. According to the CME FedWatch Tool, traders are currently pricing in about a 59% chance of a rate cut by the Fed by November.

On Wednesday, Fed Atlanta President Raphael Bostic stated that the path to achieving 2% inflation is not guaranteed and that the extent of price pressures remains significant. His comments followed recent hawkish remarks from Minneapolis Fed President Neel Kashkari, who emphasised that the US central bank should delay rate cuts until there is substantial improvement in inflation. He also indicated that the regulator excluded the possibility of more rate hikes if inflation doesn’t decrease further.

XAU/USD continued to fall during the Asian and early European trading sessions. Investors await the second estimate of US Gross Domestic Product (GDP) figures and the Initial Jobless Claims for the week ending 25 May at 12:30 p.m. UTC today. These reports are expected to provide insights into the central bank’s monetary policy outlook. If the labour market and economic data come out strong, gold will continue its decline. Otherwise, XAU/USD may correct upwards to the 2,350 level.

The Euro Falls Despite Higher-Than-Expected German Inflation

fell towards 1.08000 on Wednesday, losing 0.52% during the day. The pair had been growing since mid-April, but now the downward movement has gained momentum.

German inflation data released yesterday had little impact on the market. Although inflation rose towards 2.8%, slightly more than expected, EUR/USD didn’t react to the data. Still, rising price pressure in Germany may force the European Central Bank (ECB) to cut its interest rate slower than previously predicted. Even though the June rate cut has largely been priced in, ECB policymakers have left the market guessing on how quickly they will cut the base rate after that.

“Hotter and stickier than expected global inflation appears to be taking the air out of asset markets,” said Vishnu Varathan, head of economics and strategy for Asia ex-Japan at Mizuho Bank.

The Federal Reserve’s survey showed that economic activity in the US continued to grow from early April to mid-May. However, firms’ outlook is still pessimistic as inflation is rising. US core Personal Consumption Expenditures (PCE) Price Index report will be released on Friday. However, it’s unlikely that the data will significantly change the outlook for global monetary policy, given that inflation in the largest economies continues to rise.

Several important reports will come out today, including the eurozone Unemployment Rate, Economic Sentiment, and Industrial Sentiment reports at 9:00 a.m. UTC. Additionally, US Jobless Claims data at 12:30 p.m. UTC may add volatility to the market. The data may shed some light on the eurozone and US interest rate paths. If the eurozone data disappoints investors, EUR/USD may decrease towards 1.07400.

CAD falls as US dollar rises ahead of US inflation data

The (CAD) fell by 0.53% as the US Dollar Index (DXY) strengthened, as traders remained cautious ahead of the release of US inflation data.

Investors remain risk-averse due to fears that the Federal Reserve (Fed) will delay rate cuts until Q4. The prospect of the Fed maintaining higher interest rates for an extended period benefits the yields on interest-bearing assets. Although 10-year US Treasury yields have slightly decreased towards 4.61%, they remain near a four-week high. recorded significant losses during the Tokyo session yesterday, indicating a sharp decline in risk appetite. Meanwhile, the US Dollar Index (DXY) has surged above the critical resistance level of 105.00. The USD/CAD pair is often considered an indicator of risk sentiment in financial markets: when investors are inclined towards risk, they buy the Canadian dollar (CAD). In periods of increased risk-off sentiment, they prefer safer assets such as the US dollar, which can lead to the selling of the Canadian dollar and an increase in USD/CAD.

USD/CAD rose during the Asian and early European trading sessions. The key focus today is on US macro statistics. Specifically, the Jobless Claims report at 12:30 p.m. UTC may trigger above-normal volatility as it reveals the state of the US labour market. Higher-than-expected unemployment claims numbers may reverse the short-term bullish trend in USD/CAD. Conversely, lower-than-expected results may push USD/CAD up towards 1.37600. Additionally, investors await Friday’s Canadian Gross Domestic Product (GDP) data. The economy is expected to remain stagnant month-on-month after a 0.2% expansion in February and grow by 2.2% annually in Q1. Weak GDP figures could increase the chances that the Bank of Canada will cut interest rates in June.