Gold Remains in an Uptrend
The gold (XAU/USD) price rose 0.39% and almost reached a three-month high on Wednesday despite the slightly strengthening US dollar (USD).
XAU/USD has been on a clear uptrend over the past week, largely due to the uncertainty around US President Donald Trump's policy plans. Investors fear his policies could trigger trade wars and elevate market volatility.
"There are uncertainties with proposed tariffs and other things, and gold typically does well when there's a large or even a moderate amount of uncertainty in the market, it's a natural place where people gravitate to", said Ryan McIntyre, senior portfolio manager at Sprott Asset Management.
Trump administration was discussing imposing a 10% tariff on goods imported from China and a 25% on Mexican and Canadian goods. The combination of new trade and immigration policies is widely seen as inflationary, potentially forcing the Federal Reserve (Fed) to maintain high interest rates for an extended period to control rising prices.
As a result, the market has a rather hawkish view of the Fed's monetary policy and prices in a single 25-basis point rate cut in 2025. While a hawkish Fed exerts downward pressure on gold, the profound uncertainty about the future of global trade creates anxieties about economic growth and market stability. Worries over the state of the global economy seem more influential, potentially driving investors towards gold as a safe-haven asset despite higher interest rates.
XAU/USD was relatively unchanged during the Asian and early European trading sessions. Today, investors should focus on US Jobless Claims, due at 1:30 p.m. UTC. Weaker-than-expected figures might extend the underlying bullish trend in XAU/USD, while stronger-than-expected results may provoke a pullback towards $2,730. In addition, traders should pay attention to Donald Trump's speech at Davos at 4:00 p.m. UTC. He might lay out his vision for the global economy's future, which could create some volatility in the market.
"Spot gold still targets a range of $2,719 to $2,728 per ounce, as suggested by its wave pattern and the bearish divergence on the hourly RSI," said Reuters analyst, Wang Tao.
Monetary Policy Divergence Pressures the Euro
The euro (EUR/USD) lost 0.21% against the US dollar (USD) on Wednesday as the greenback rebounded from a three-week low.
Investors continue to await concrete announcements about US President Donald Trump's tariff plans. Because these policies have an inflation risk and may force the Federal Reserve (Fed) to maintain restrictive monetary policy, traders are unwilling to sell USD. Meanwhile, several European Central Bank (ECB) officials advocated for further rate cuts on Wednesday. Thus, a 25-basis-point (bps) reduction next week is almost guaranteed, with additional cuts expected, marking a clear divergence from the Fed's more cautious stance. According to Reuters, markets are pricing in a roughly 96% chance for a rate cut of at least 25 bps by the ECB at its policy meeting next week.
As for the eurozone economy, it still doesn't show convincing signs of sustained recovery, hampered by persistent structural issues, weak global demand, and lingering uncertainties. Tuesday’s data revealed another drop in German ZEW Economic Sentiment.
EUR/USD was virtually unchanged during the Asian and early European trading sessions. Today, investors should focus on the US Jobless Claims report, due at 1:30 p.m. UTC. Weaker-than-expected figures might push EUR/USD above 1.04430, while stronger-than-expected results may provoke a downward correction towards 1.03550. In addition, traders should pay attention to Donald Trump's speech at Davos at 4:00 p.m. UTC. He might give more details about his plans and outlook on the global economy's future, which could create some volatility in the market.
Strong US Dollar Continues to Pressure the Japanese Yen
The Japanese yen (USD/JPY) lost 0.66% against the US dollar (USD) on Wednesday as the greenback rebounded from a three-week low.
Like other currencies, JPY is under pressure from the persistent strength of the US dollar, driven by the Federal Reserve's (Fed) hawkish stance on monetary policy and the relative resilience of the US economy. Furthermore, the Bank of Japan's (BOJ) ultra-loose monetary policy contrasts sharply with the relatively restrictive measures implemented by other central banks in advanced economies.
USD/JPY experienced above-normal volatility during the Asian and early European trading sessions but generally continued increasing. Strong volatility may be due to market players bracing for an expected interest rate hike from the BOJ at its monetary policy meeting tomorrow.
At around 4:00 a.m. UTC, the bank is expected to announce its rate decision and issue the latest policy statement. Traders expect the BOJ to raise its base interest rate by 25 bps towards 0.5%. However, the market usually moves not because of the decision itself, but because of the new details revealed in the accompanying reports and during the press conference.
"BOJ Governor Kazuo Ueda is seen taking a careful tone when communicating the bank's future path if the BOJ raises rates to avoid causing market turmoil", said Ryutaro Kimura, a fixed income strategist at AXA Investment Managers.
If the bank downgrades its economic forecast and Kazuo Ueda, the BOJ Governor, renounces a pledge to keep pushing up borrowing costs, USD/JPY will rise. If the BOJ statement includes better economic assessments and Kazuo Ueda makes hawkish remarks, the pair may drop significantly.