Euro and gold rise as dollar weakens on rate cut expectations

In recent weeks, substantial trends have emerged in the currency markets due to the collapse of the US dollaroften referred to as “King Dollar”. The euro strengthened against the dollar to above 1.09, the highest level since March 10, while the pound rose above 1.30 against the greenback for the first time since July 2023.

For its part, Gold futures hit a new high of $2,488 an ounce before retreating slightly on Wednesday. The U.S. dollar index, which measures the dollar’s value against a basket of currencies, fell below 104, its lowest level since March 21.

The Federal Reserve (Fed), the main central bank, is expected to initiates its first rate cut since the 2020 pandemicfollowing weaker-than-expected US inflation data released last week. Investors will also be keeping a close eye on the European Central Bank’s (ECB) interest rate decision, due on Friday this week.

The euro and the pound may come under further upward pressure

The euro has overcome the political jitters of the French elections, and its exchange rate against the US dollar has risen more than 2% in the last four weeksThe ECB’s upcoming interest rate decision could put further upward pressure on the currency as markets expect the bank to maintain an aggressive stance following its first rate cut in June.

The markets have discounted a reduction of 0.4 percentage points by the bank for the rest of the year, with a second cut likely in September. However, uncertainty remains over whether the ECB will make a third cut in December.

Instead, the Federal Reserve is expected to apply a 0.25 percentage point cut in Septemberpossibly followed by two additional cuts in November and December, which would mean a total reduction of 0.75% in interest rates this year. Therefore, expectations of a rate cut by the Fed could continue to strengthen the euro against its US counterpart.

Higher-than-expected UK consumer price index (CPI) data on Wednesday raised the likelihood that the Bank of England will keep interest rates higher for longerwhich pushed the pound to a new high. The Fed is widely seen as being at a turning point towards a more dovish stance, while other central banks maintain a more conservative policy.

Gold experiences an unprecedented rise

Gold could also continue to rise due to the Possible start of a rate cut cycle by the Fed. Historically, precious metal prices have entered an uptrend when the US dollar has entered a downtrend.

As gold is globally priced in US dollars, a weaker dollar causes gold more affordable for buyers that use other currencies. This tends to boost the demand for gold and, consequently, its price.

Global economic uncertainty is expected to continue slowing growth and rising geopolitical tensions further reinforce the attractiveness of gold as a safe haven asset.

According to the World Gold Council, “an increasingly complex geopolitical and financial environment makes the management of gold reserves be more relevant than ever“Central banks have been increasing their gold reserves over the past two years, adding a total of 1,037 tonnes by 2023.

Gold has repeatedly hit new highs this year, with an increase of almost 20% so far this yearoutperforming 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.