Both the euro and the British pound surged further against the US dollar, while gold prices hit a fresh high before pulling back on Wednesday. The dollar’s weakness may continue to exert upside pressure on currencies and metal prices amid growing expectations of rate cuts by the Federal Reserve.
In recent weeks, substantial trends have emerged in the foreign exchange markets due to a slump in the US dollar, often referred to as “king dollar”. The euro strengthened against the US dollar to above 1.09, the highest since 10 March, while the pound surged above 1.30 against the greenback for the first time since July 2023.
Meanwhile, gold futures reached a fresh high of $2,488 per ounce before experiencing a slight pullback on Wednesday. The US dollar index, a measure of the dollar’s value against a basket of foreign currencies, fell below 104, its lowest since 21st March.
The Federal Reserve (Fed), the leading central bank, is expected to initiate its first rate cut since the pandemic in 2020 following weaker-than-expected US inflation data released last week. Investors will also closely monitor the European Central Bank’s (ECB) rate decision scheduled for Friday this week.
The euro and pound may face further upside pressure
The euro has shrugged off political jitters from the French election, with its exchange rate against the US dollar rising more than 2% over the last four weeks. The upcoming ECB rate decision could continue to exert upside pressure on the currency, as markets expect the bank to maintain a hawkish stance after delivering its first rate cut in June.
Markets have priced in a 0.4 percentage point reduction by the bank for the remainder of the year, with the second cut likely in September. However, uncertainty remains over whether the ECB will proceed with a third cut in December.
In contrast, the Fed is widely expected to implement a 0.25 percentage point cut in September, possibly followed by two additional cuts in November and December, amounting to a total reduction of 0.75% in interest rates this year. Therefore, heightened and faster rate cut expectations by the Fed may continue to strengthen the euro against its US counterpart.
On Wednesday, higher-than-expected Consumer Price Index (CPI) data from the UK increased the likelihood of the Bank of England maintaining higher interest rates for a longer period, pushing sterling to a fresh one-year high. Generally, the Fed is seen to be at a turning point towards a more dovish stance, while other central banks maintain a more conservative policy stance.
Gold experiences unprecedented surge
Gold may also continue to surge due to the potential start of a rate-cutting cycle by the Fed. Historically, precious metal prices have entered an uptrend when the US dollar has entered a downtrend.
As gold is priced globally in US dollars, a weaker dollar makes gold more affordable for buyers using other currencies. This tends to boost demand for gold and, consequently, its price. Global economic uncertainty amid slowing growth and increasing geopolitical tensions is expected to further enhance gold’s appeal as a safe-haven asset. According to the World Gold Council: “An increasingly complex geopolitical and financial environment is making gold reserves management more relevant than ever.” Central banks have been increasing their gold reserves over the past two years, adding a total of 1,037 tonnes in 2023.
Gold has repeatedly reached new highs this year, up nearly 20% year-to-date, outperforming the S&P 500. However, the World Gold Council stated that: “Gold may continue to move in a similar range to what we have seen in recent months” in its Gold Mid-Year Outlook 2024.