Gold Drops After the Fed Monetary Policy Meeting
The gold ( XAU/USD ) price declined by 0.2% on Wednesday as the US dollar (USD) and bond yields rose after the Federal Reserve ( Fed ) held interest rates unchanged and gave little data about when potential rate cuts might occur.
Asset markets are leaking a little bit after the statement leaned a little more hawkish than expected, with gold marginally lower', said Tai Wong, an independent metals trader. Fed Chair Jerome Powell said there was no rush to cut the rates as inflation remained above the central bank's target, economic growth continued, and the unemployment rate was low. Indeed, while the US economy seems robust, its future is uncertain. Recent economic data has been positive, but potential policy changes from the Donald Trump administration regarding immigration, tariffs, and taxes could create instability and drive inflation higher.
At the same time, officials are optimistic that inflation will continue to decline this year. However, they prefer to maintain higher interest rates until more economic data confirms the inflation slowdown. According to Reuters, short-term interest rate futures show that investors expect the central bank to hold the rates unchanged until June. As a non-yielding asset, gold tends to perform well when interest rates decline. Still, the fundamental pressure on XAU/USD is somewhat bearish, as a stronger US dollar, rising bond yields, and the Fed's cautious stance on interest rate cuts outweigh safe-haven demand.
XAU/USD was falling slightly during the Asian and early European trading sessions. Today, the focus is on the European Central Bank (ECB) interest rate decision at 1:15 p.m. UTC and the US Pending Home Sales report at 3:00 p.m. UTC. Although the events are unlikely to affect gold significantly, they can still stoke short-term volatility. Key levels to watch are support at $2,740 and resistance at $2,770.
Euro Awaits ECB Interest Rate Decision
The euro ( EUR/USD ) lost 0.08% against the US dollar (USD) on Wednesday after the Federal Reserve (Fed) left interest rates unchanged and provided little clarity on the timing of future rate cuts.
Fed officials unanimously decided to maintain the interest rates within the current 4.25–4.5% range. The central bank is now in a wait-and-see mode as it seeks more data on inflation and employment and greater clarity on the effects of President Donald Trump's policies. During the press conference, Fed Chair Jerome Powell stated that it was still too early to assess the impact of Trump's policies, emphasising that the official 2% inflation target will continue to guide the central bank's decisions. Although the Fed kept the rates unchanged, markets continue to err on the side of caution and price in the probability that US trade policy may undergo dramatic changes in the coming months. Therefore, safe-haven flows in the US dollar continue, and the greenback remains well supported against other major currencies, including the euro.
Indeed, tariff risks are a major concern for investors. According to Reuters, Howard Lutnick, Trump's nominee to head the Commerce Department, said he had advised the president to pursue across-the-board tariffs country-by-country to restore 'reciprocity' to America's trading relationships. Meanwhile, the eurozone economy continues to disappoint investors. Yesterday's data revealed that the German GfK Consumer Climate Index declined in January, putting additional bearish pressure on EUR/USD.
EUR/USD was falling slightly during the Asian and early European trading sessions. Today, all eyes will be on the European Central Bank (ECB) rate decision due at 1:15 p.m. UTC. In addition, the ECB President, Christine Lagarde, will hold a press conference at 1:45 p.m. UTC. Both events are expected to impact the market significantly and may provoke sharp moves, particularly in EUR-related pairs. Traders and investors expect the ECB to cut its deposit and refinancing rates by 25 basis points (bps) each. Still, the decision itself typically doesn't cause significant market fluctuations. It's the additional information unveiled in the Monetary Policy Statement and the press conference that often drives substantial market movements. The central bank's outlook for inflation, economic growth, and interest rates can significantly influence investor sentiment and lead to notable price changes. Key levels to watch are support at 1.04000 and resistance at 1.04400.
BOJ Hawkish Stance Supports Japanese Yen
The Japanese yen ( USD/JPY ) gained 0.21% against the US dollar (USD) on Wednesday despite the strengthening US Dollar Index following the Federal Reserve's (Fed) decision to leave the rates unchanged.
USD/JPY has been in a downtrend since mid-January. The decline accelerated last week when the Bank of Japan (BOJ) raised interest rates to the highest level since the 2008 global financial crisis. The bank also revised its inflation forecasts, underscoring its confidence that rising wages will keep inflation stable around its 2% target.
The BOJ stands out as the most hawkish major central bank despite fears that Trump tariffs might trigger global economic turmoil. Investors' expectations for more rate hikes by the Japanese central bank will likely continue to put downward pressure on USD/JPY. Interest rate swaps market data currency prices in a 41% chance that the BOJ will hike its base rate by 25 basis points (bps) in June. The possibility of higher rates increased following the release of the latest core Consumer Price Index, which rose to 1.9% in December.
USD/JPY was falling during the Asian and early European trading sessions. Today’s macroeconomic calendar is relatively uneventful for the pair. However, the US Pending Home Sale report at 3:00 p.m. UTC may trigger short-term volatility. Higher-than-expected figures may temporarily pause the bearish trend in USD/JPY. Conversely, lower-than-expected results may quickly push the pair down towards 154.000