XAU - Or JPY

Trading sight!

The gold price (XAU/USD) begins the year 2024 on a positive note, exhibiting stability on Tuesday in anticipation of a Federal Reserve (Fed) interest rate cut beginning in March. Significant progress in the underlying inflation rate falling toward 2% and improving labor market conditions as a result of the restrictive monetary policy stance are factors that are bolstering expectations for a rate cut.

Investors ought to be prepared for an abundance of volatility this week, as numerous economic indicators are scheduled for release. Following the ISM manufacturing PMI, JOLTS job openings data, and minutes of the Federal Open Market Committee's (FOMC) December monetary policy meeting, the Services PMI and the Nonfarm Payrolls (NFP) report will be released. It is improbable that market participants will alter their pessimistic position on the US Dollar and Treasury yields in light of the Fed's intensifying rate-cutting expectations.

Gold surges to approximately $2,075 on anticipation of early interest rate reductions by the Federal Reserve in 2024.

The CME FedWatch tool estimates that the probability of the Federal Reserve lowering interest rates by 25 basis points (bps) to 5.00-5.25% is 72%. The 72% probability that the Federal Reserve will maintain rate cuts in May is comparable.

The appeal of the gold price has increased since December's monetary policy meeting, where Federal Reserve Chairman Jerome Powell shifted his stance from supporting higher extended interest rates to suggesting that rate reduction may be a subject of discussion in the future.

Nevertheless, Jerome Powell cautioned that the primary aim of the Federal Reserve is to guarantee price stability.

Labor market, manufacturing, and services PMI data are anticipated this week, so investors should anticipate volatile price movement. Furthermore, investors will direct their attention towards the FOMC minutes, anticipating their release on Wednesday.

The October Manufacturing PMI from the Institute of Supply Management (ISM) is anticipated to be 47.1, an increase from the previous reading of 46.7.

An economic activity contraction is denoted by a value falling below 50.0, and this would constitute the fourteenth consecutive contraction in the US factory data.

On Wednesday, the US Bureau of Labor Statistics is expected to release JOLTS Job Openings data for the month of November. The number of jobs advertised by employers in the United States increased to 8.850 million from the previous demand of 8.733 million.

Investors will place considerable emphasis on the FOMC minutes. The minutes of the FOMC will include a comprehensive rationale for maintaining interest rates at a consistent level of 5.25%-5.50% for the third consecutive meeting. Aside from that, guidance for interest rates in 2024 and detailed projections of labor market conditions and inflation will occupy the attention of investors.

In the interim, on Tuesday, the US Dollar Index (DXY) rose to near 101.50. Firmer rate-cut wagers caused the USD Index to end its winning trend that had begun in 2020 in 2023.

The USD Index will be influenced this week by the labor market data report, which is slated for release on Friday. Prior to that, however, market participants will be preoccupied with the Thursday release of private payroll data by Automatic Data Processing (ADP) for the United States.

The consensus estimate is that private employers in the United States hired 113,000 job-seekers in December, compared to 103,000 individuals hired in November.

JPY - Scenarios

Despite the fact that there is no follow-through, the Japanese yen experiences a little depreciation in comparison to the United States dollar on Tuesday.

It is expected that wagers that the Bank of Japan would leave the policy of negative interest rates will help minimize future losses.

The dollar's rebound is being capped by the Fed's pessimistic outlook, which should serve as a headwind for the dollar to yen exchange rate.

Following the disastrous earthquake that occurred in the central region of Japan on Monday, the Japanese yen (JPY) begins the new year on a worse note than it did in the previous year. Aside from this, the bullish tone that has surrounded the USD/JPY pair during the first half of the European session has been supported by a little surge in the strength of the United States Dollar (USD), which has been reinforced by an additional increase in the yields on US Treasury bonds. Having said that, the fact that the Bank of Japan (BoJ) and the Federal Reserve have different views for the future policy action of the two institutions prevents any additional advances for the major.

There is a widespread consensus among market participants that the Bank of Japan (BoJ) will abandon its ultra-loose monetary policy and bring interest rates into positive territory by the first half of the year 2024! After the yearly salary discussions that took place in March, the present price indicates that there is a significant probability that such an action will take place in April. On the other hand, it is projected that the Federal Reserve (Fed) would begin reducing interest rates as early as March 2024. Expectations of a more dovish Federal Reserve should, in the meanwhile, limit the yields on US bonds and the value of the dollar. This, in turn, will favor bulls of the Japanese yen and limit the USD/JPY pair.