Investors Reallocate Their Capital to Gold
Gold (XAU/USD) extended its rally yesterday, rising 0.78% and nearing the $2,650 resistance level. A breakout above $2,650 could signal the end of a downward correction and a return to the global uptrend.
Geopolitical tensions between Russia and Ukraine continue to drive demand for safe haven assets. Recent news about the possibility of the US allowing the use of long-range missiles has prompted investors to seek safe haven assets and rush into gold. The possible consequences of this decision aren't fully clear, and it may lead to a negative reaction from Russia. Russian President Vladimir Putin on Tuesday signed a decree approving an updated nuclear doctrine that changes situations when Russia can use nuclear weapons. Despite these developments, recent comments from US and Russian officials have eased fears of a full-scale nuclear conflict.
Meanwhile, plans for a tax reduction announced by the next US President Donald Trump and his administration could boost inflation, potentially prompting the Federal Reserve (Fed) to raise interest rates.
Kansas City Fed President Jeffrey Schmid downplayed concerns about inflation, stating that a large fiscal deficit wouldn't necessarily create inflationary pressure, as the central bank would manage it. The CME FedWatch tool indicates a less than 60% probability of a 25-basis-point rate cut in December.
Today, gold may attempt to break above the $2,650 resistance level. If XAU/USD fails to hold above the level, the pair could decline back to around $2,600.
"Spot gold may rise to $2,665 per ounce, as it has broken a falling trendline and resistance at $2,634", said Reuters expert Wang Tao.
Euro Stabilises on Mixed Data and Nuclear Threats
The euro (EUR/USD) finished Tuesday essentially unchanged against the US dollar (USD) amid increased volatility induced by rising geopolitical risks.
Initially, EUR/USD fell below 1.05450 but regained most of its losses after US housing data came out mixed and indicated a slowdown in residential construction. However, the data release wasn't important enough to change the established bullish trend in USD. Furthermore, safe haven currencies got an additional boost yesterday as Russia announced that it would lower its threshold for a nuclear strike in response to Joe Biden's decision to allow Ukraine to use US-made weapons to strike deep into Russia. However, the initial market response was tempered by Russian Foreign Minister Sergei Lavrov's assurance that Russia would do everything possible to prevent a nuclear conflict.
"We're seeing a reversal after Lavrov's comments; also the US won't respond to this change in the Russian nuclear doctrine, that's played a role too in sentiment calming down here a bit. A nice three-week flush of over-leveraged long positions and geopolitical risk hasn't gone away; it's still a crazy, dangerous world out there", said Erik Bregar, director of FX & precious metals risk management at Silver Gold Bull in Toronto.
Meanwhile, eurozone inflation figures largely aligned with market expectations and with the European Central Bank (ECB) target of 2%. The economic data opens the door for the ECB to continue cutting interest rates.
EUR/USD was falling slightly during the Asian and early European trading sessions. Today's formal macroeconomic calendar doesn't feature any important data releases. However, a speech by Christine Lagarde, the ECB president, at 1:00 p.m. UTC may trigger some volatility. EUR/USD traders should monitor the following levels: 1.06300 and 1.05560. An escape from this range may determine the trend direction.
Australian Dollar Grows for the Third Consecutive Session
The Australian dollar (AUD/USD) grew by 0.36% on Tuesday as the US dollar lost some of its recent gains.
The Aussie dollar kept getting some support from the hawkish outlook on interest rates by the Reserve Bank of Australia (RAB). The minutes from the last meeting of Australia's central bank showed that they're still watching out for any signs of inflation.
The central bank is still pretty hawkish in terms of its comments about the economy and compared to other countries. Still, JPMorgan analysts think officials might change their view in the future. Experts think there's a chance for a rate cut in February, but it will depend on the upcoming economic data. The market prices in about a 37% chance of a 25-basis-point rate cut in February. Overall, investors don't expect the first rate cut until May.
Investors are still waiting for US President Donald Trump to announce a Treasury secretary. Some of his picks have caused controversy because people lack relevant experience. The ‘Trump trades’ that boosted the US dollar is facing challenges with Trump's controversial picks for his cabinet and the escalating situation in Russia and Ukraine.
In the long term, traders should focus on solid economic data and the chances that the Fed might need to slow cutting rates in 2025. Last week, Fed Chairman Jerome Powell said the economy isn't sending any signs that we need to rush to lower interest rates after a string of strong economic indicators. Still, markets expect a rate cut at the next Fed meeting in December, but the odds have dropped towards 57.3%, according to FedWatch. A month ago, the chances for a reduction were 76.8%.
AUD/USD has been declining during Asian and early European trading hours. No major events that could influence the pair are expected today.