On Tuesday, US Treasury yields experienced a slight decline as investors evaluated the economic outlook, focusing on inflation and its potential implications for Federal Reserve monetary policy. The yield on the 10-year Treasury decreased by just over one basis point to 4.2742%, while the 2-year Treasury yield saw little change and was last trading at just under one basis point lower at 4.9905%. Notably, yields and prices have an inverse relationship; one basis point represents 0.01%.
Incoming inflation data to influence Fed’s decision
Investor attention remains directed towards significant inflation data scheduled for later in the week, which could provide insights into the Fed’s stance on interest rates. They will closely watch the data for potential impact on monetary policy decisions.
Investors will closely monitor the release of consumer inflation data for August on Wednesday, followed by wholesale inflation figures for the same month on Thursday. This data will provide important insights into whether the central bank will likely implement further interest rate hikes this year.
Although the Fed is anticipated to maintain interest rates at their current levels during its September meeting next week, there is growing uncertainty about the central bank’s future course of action. Recent data, including strong performance in the labor market, has raised questions about the potential resilience of the economy.
That has led to renewed concerns among investors about the potential impacts of higher interest rates on the economy and whether a recession could be on the horizon. Meanwhile, Federal Reserve officials have not ruled out the possibility of further rate hikes in recent statements, and they have emphasized that data, particularly related to inflationary pressures, will be a crucial factor in their decision-making process.
US interest rates influence on gold
Gold prices have been significantly influenced by the direction of the US dollar and the movements in US Treasuries, both tied to US interest rates. If the market anticipates an impending increase in US interest rates, it tends to result in higher yields and a stronger US dollar. Gold is most affected when yields and the dollar move in the same direction, as they typically have an inverse relationship. Gold prices tend to fall when yields and the dollar rise, and vice versa.
Lower expectations for US interest rates weaken the US dollar and lead to lower yields. Therefore, the most favorable conditions for higher gold prices involve a weaker dollar and declining yields due to reduced expectations for US interest rates.
Last week, strong US economic data raised expectations of higher interest rates in the US. The US ISM PMI services data exceeded market expectations, and US jobless claims were lower than expected. These positive economic indicators boosted the US dollar and pushed yields higher, which hindered the upward movement of gold prices during that period.
US Dollar edges higher across different markets
The EUR/USD pair experienced a 0.1% decline, reaching 1.0732. That came after Spanish inflation figures for August were in line with expectations, showing a 2.6% rise on an annual basis, up from 2.3% in the previous month.
Looking ahead, the European Central Bank is scheduled to meet, and there’s an ongoing debate among policymakers about whether to raise the deposit rate further to 4% or opt for a pause. Inflation in the Eurozone remains above target, but there’s a noted slowdown in economic growth across the region. The upcoming German ZEW economic sentiment data is expected to reflect a decline in confidence, particularly in the Eurozone’s dominant economy.
The USD/JPY pair saw a 0.2% increase, reaching 146.87. That followed comments from Bank of Japan Governor Kazuo Ueda, hinting that an end to the BOJ’s negative interest rates policy could be on the horizon. While this development may favor the yen, the currency is still recovering from significant losses this year, largely attributed to the widening gap between local and international interest rates.
The USD/CNY pair rose by 0.1% to 7.2924, with the yuan maintaining its position above the 16-year low seen on Friday. China’s central bank has recently implemented a series of robust daily midpoint rates. However, doubts persist regarding the strength of China’s recovery from the impact of COVID-19. Investors now predict a 5% GDP growth for 2023, aligning with China’s official forecast but falling short of estimates from investment banks.
