Gold Dips as Investors Anticipate Gradual Rate Cuts by the Fed
Gold (XAU/USD) price dropped by 1.23% on Tuesday due to the strengthening US dollar (US Dollar) and rising Treasury yields as investors increasingly expect only gradual rate cuts in 2025.
The US Retail Sales report released on Tuesday added some bearish pressure on XAU/USD. The report showed that retail sales rose by 0.7% in November amid an acceleration in motor vehicle purchases, signalling that inflation may remain elevated. Thus, data suggested that the Federal Reserve Fed could pause rate cuts in January.
XAU/USD was relatively unchanged during the Asian and early European trading sessions. Fed will announce its interest rate decision today at 7:00 p.m. UTC. Traders expect the central bank to cut its base interest rate by 25 basis points (bps). However, the main focus will be on Fed Chair Jerome Powell's commentary as market participants try to get more clues on the US monetary policy path for 2025, especially in the light of President-elect Donald Trump's tariff plan, which economists say would stoke further inflation. The Fed will also release its latest economic projections and the dot plot, providing valuable insights into the central bank's future policy direction.
Typically, the market moves not because of the decision itself but because of the new details revealed in the FOMC Statement and during the press conference, due at 7:30 p.m. UTC. If the Fed downgrades its economic forecast and Jerome Powell hints that more rate cuts are coming, XAU/USD will rise. If the FOMC Statement includes better economic assessments and Jerome Powell makes hawkish statements or sounds less dovish than the market expects, XAU/USD may drop significantly. ‘Spot gold may retest support at $2,633 per ounce; a break could trigger a drop into the $2,613 to $2,623 range’, said Reuters analyst Wang Tao.
The US Economy's Strength Pressures the Euro
The euro (EUR/USD) lost 0.2% against the US dollar (USD) on Tuesday as the greenback strengthened against most major currencies following better-than-expected retail sales data.
Yesterday's US Retail Sales report indicated that the underlying economic momentum in the US is resilient, defying expectations of a slowdown. Strong economic data, coupled with expectations of potentially rising inflation from Donald Trump policies, leads investors to expect fewer rate cuts from the Federal Reserve (Fed) in 2025.
At the same time, the US Dollar Index (DXY) is already just 1% below a two-year high, meaning that many bullish factors are already priced in.
"'The market is trying to debate whether it's time to fade the dollar, which has had an incredible run this year. But it seems hard to really push back against US exceptionalism and a stronger dollar going into the new administration, whether we're talking about a Fed that will probably not seem as dovish as did in September or the challenges that keep popping up in the emerging and developed markets that make the dollar a safe haven", said Marvin Loh, senior global market strategist at State Street.
At the same time, the European Central Bank (ECB) has explicitly stated that more rate cuts are highly likely. 'If the incoming data continue to confirm our baseline, the direction of travel is clear, and we expect to lower interest rates further', Christine Lagarde, the ECB President, said in a speech in Vilnius. By mid-2025, investors expect US interest rates to be in the 4–4.25% range and anticipate the ECB to reduce borrowing costs towards just 2% over the same period. This divergence in monetary policy expectations between two central banks continues to exert a bearish pressure on EUR/USD.
EUR/USD was rising slightly during the Asian and early European trading sessions. Today, the main focus is on the Fed's interest rate decision due at 7:00 p.m. UTC. Attention is also on the Fed's updated economic projections and the dot plot, which could shift expectations for the rate trajectory through 2025 and 2026. If the FOMC statement adds hawkish details, EUR/USD will likely fall below the important 1.04500 level. Conversely, dovish rhetoric by Jerome Powell may temporarily pull the pair towards 1.05770.
Yen Declines Ahead of Two Central Banks' Interest Rate Decisions
USD/JPY declined by 0.043% ahead of the Federal Reserve (Fed) and the Bank of Japan (BOJ) interest rate decisions.
The BOJ is expected to maintain its policy rate of 0.25% at its meeting this week while focusing on domestic wage and price dynamics in light of uncertainties surrounding US economic policies. However, the central bank can't exclude a possible rate increase if the Japanese yen (JPY) weakens significantly, as the USD/JPY exchange rate is currently hovering just below the 154.000 level. During the meeting, the BOJ will also review its past monetary policy decisions and assess its strengths and weaknesses. Additionally, the bank may announce plans to begin reducing its exchange-traded fund (ETF) holdings in 2026. As indicated by the December Tankan Survey, positive signs in the labour market support expectations for wage increases in 2025. If wage-price dynamics continue, the BOJ could raise interest rates in January, reaching 1% by the end of 2025.
Meanwhile, the Fed is anticipated to lower interest rates by 25 basis points (bps) with a 97% chance, bringing it to the 4.25–4.5% range, according to the CME FedWatch tool. Market participants will pay close attention to how the Fed expects to reduce rates further in 2025, given recent strong inflation and economic activity data. The regulator may indicate a more moderate path by adjusting its projections, expecting only three rate reductions in 2025 instead of four, according to a report by IG market analyst Tony Sycamore. If the forecast shows only two reductions, it could be considered a more hawkish move, aligning with current market expectations but also indicating a more cautious approach. Tuesday's data indicated a robust US economy, with retail sales exceeding expectations. With the incoming Trump administration promising tariffs and tax cuts, investors are considering their implications for the US monetary policy outlook.
USD/JPY was declining during Asian and early European trading hours. The BOJ and the Fed interest rate decisions are the most important events today. The US central bank will announce its decision at 7:00 p.m. UTC today, and the BOJ will deliver a decision at 3:00 a.m. UTC on Thursday.