The European Central Bank and U.S. GDP enter the countdown to their consecutive debuts, and the gold market waits with bated breath

Entering the European market, spot gold continued to consolidate at a low level on Thursday (January 25), with the current price around $2,015. Gold prices suffered a sharp sell-off yesterday. On this trading day, the market's focus turned to the European Central Bank's resolution, focusing on Lagarde's response to expectations of interest rate cuts, which may affect the trend of the euro. In addition, 15 minutes after the release of the European Central Bank's decision, the market will also receive US fourth-quarter GDP data.

Gold prices hovered near a one-week low on Thursday, driven by a stronger U.S. dollar and rising U.S. bond yields. Market attention is focused on the European Central Bank policy meeting and U.S. GDP data to be released later. After falling by more than 15 US dollars yesterday, spot gold consolidated at a low level during the day. The current trading price is about 2,015 US dollars. The market is waiting for today's important events in Europe and the United States.

Gold prices hit their lowest level in nearly a week at $2,011 on Wednesday after data showed the U.S. economy was strong at the start of 2024, with business activity picking up in January and inflation appearing to be weakening. Kyle Rodda, a financial market analyst at Capital.com, said that the U.S. economy continues to be strong, allowing the market to rule out policy easing and the risk of economic recession. However, strong economic data in the coming weeks and possible steps from the Federal Reserve at the end of its January policy meeting will leave gold vulnerable to further losses.

The U.S. dollar index held steady near a six-week high, making U.S. dollar-denominated gold less attractive to holders of other currencies. Meanwhile, the benchmark 10-year Treasury note yield was close to a more than one-month high of 4.198% hit last week. The U.S. dollar index has gained about 2% this month as traders sharply scaled back their bets on a sharp early interest rate cut by the Federal Reserve following pushback from central bank officials and a slew of data showing the resilience of the U.S. economy.

The market currently predicts a 43% chance of the Federal Reserve cutting interest rates in March. However, those expectations have largely been pushed back to May, with an 88% chance, according to LSEG's interest rate probability app IRPR. Traders also expect 134 basis points of rate cuts this year, compared with 160 basis points by the end of 2023. Lower interest rates reduce the opportunity cost of holding non-yielding gold.

European Central Bank decision comes out

Although the European Central Bank is expected to keep interest rates unchanged, the market focus is on whether Lagarde will deviate from expectations. She firmly rejected market bets on a rate cut as early as April at a press conference (21:45 Beijing time on Thursday evening) . The market expects the European Central Bank to cut interest rates by 130 basis points this year.

The market is focused on the European Central Bank decision, with investors eager to determine when the central bank may start cutting interest rates, after policymakers denied the possibility of easing monetary policy quickly and early. The European Central Bank will keep interest rates on hold later in the day, but its statement and Lagarde's post-meeting press conference will be interpreted as clues about future trends. Lagarde is expected to echo the comments of some of her colleagues at the European Central Bank who have strongly pushed back against market expectations for a series of aggressive rate cuts.

MUFG senior foreign exchange analyst Lee Hardman said that President Lagarde will send a clear message on the possible timing of the European Central Bank's first interest rate cut, which they plan to cut in the summer. We expect this message to be reiterated at today's policy meeting, which should mean that the ECB's current policy is more of a hold on hold, which may have limited impact on the euro's performance.

U.S. GDP attracts market attention

Fifteen minutes after the European Central Bank announces its interest rate decision, the United States will announce the initial value of fourth-quarter gross domestic product (GDP). According to one survey, annualized growth is expected to be 2%, although estimates range from 0.8% to 2.8%. Even in the high range, it was a marked slowdown from 4.9% in the July-September quarter. The data is still likely to show the U.S. avoids recession in 2023 and reflects slower inflation in the previous quarter, raising expectations for a rate cut sometime in the first half of 2024.

The U.S. dollar has always been subject to the market's view of the Fed's interest rate path, and this dynamic will not change in the short term. Other U.S. data this week include personal consumption expenditures (PCE), the Fed's favorite inflation gauge, due out on Friday. The Fed is widely expected to keep rates unchanged next week, but comments from Fed Chairman Jerome Powell will be closely watched to assess whether the central bank is ready to start cutting interest rates.

David Katimbo-Mugwanya, head of fixed income at EdenTree, said the key now is that the market has been actively pricing in interest rate cuts. What we've seen since the beginning of the year is a reduction in those expectations. Central banks agreed that they would need time to reassess the changes, especially if inflation returns to target.

Similarly, investors expect the Federal Reserve to cut U.S. interest rates to 3.75-4.25% by the end of the year from the current 5.25-5.5%. With inflation still not back to 2% and economic growth holding up, some think this view is too optimistic.

Additionally, U.S. data are expected to show the economy grew at an annualized rate of 2% in the fourth quarter. A slew of other data is also due, including inventories, new home sales and weekly jobless claims, which should provide more clues to markets after the Fed's meeting in late January.