Gold Continues its Downward Correction
Gold (XAU/USD) continued its downward correction, falling by nearly 1% yesterday. XAU/USD broke below multiple support levels, and now the support level at $2,550 may slow the drop.
The latest US inflation data aligned with expectations. Still, gold reacted negatively as US Treasury yields and the US dollar (USD) continued to rise, hitting a new yearly high. The Consumer Price Index (CPI) increased from 2.4% towards 2.6% annually, with a monthly rise of 0.2%. According to the CME FedWatch Tool, the probability of a cut increased towards 82%, up from only 58% yesterday. Despite growing expectations for a 25-basis-point rate cut by the Federal Reserve (Fed) in December, it didn't slow the US dollar's rise.
Analysts expect that policies under Donald Trump may hinder the Fed's plans for monetary easing if he implements tax and tariff cuts. Market participants are focused on today's Fed Chair Jerome Powell speech, US Producer Price Index (PPI), and employment data releases. Recently, several Fed officials, including Minneapolis Fed President Neel Kashkari, have advocated for lowering borrowing costs and suggested inflation moves towards the 2% goal.
XAU/USD may continue to decline towards support levels of $2,550 and $2,520. However, while gold is in an extended correction, it's too early to talk about a significant reversal of the long-term upward trend.
Euro Drops to a One-year Low
The euro (EUR/USD) declined by 0.56% against the US dollar (USD) on Wednesday after the October US Consumer Price Index (CPI) report aligned with expectations, suggesting a slowdown in disinflation progress.
US consumer prices rose in October, driven mainly by higher housing costs like rent. Even though the data aligned with market forecasts, progress in tackling inflation has slowed. The economic data may prompt the Federal Reserve (Fed) to scale back its planned interest rate cuts next year.
"I'm not sure the inflation data pushed things around too much since it was pretty much in line with expectations. I think it's just a continuation of the Trump trade kind of mindset leading to strengthening the dollar on a broad basis, but also kind of a flushing of some of the emerging market long positions," said Brad Bechtel, Global Head of FX at Jefferies.
Economists predict higher inflation next year if Trump advances his policies, including tax cuts, increased import tariffs, and deportation measures. Although a December rate cut is still expected, further reductions in 2025 seem limited. US Treasury yields rise due to investors' confidence that Trump's policies will face minimal resistance, given the Republican majority in the Senate and a near-certain majority in the House.
The euro remains under pressure due to several factors. First, diverging expectations for monetary policy between the European Central Bank (ECB) and the Fed favour the USD. Second, Trump's new tariffs could harm the eurozone economy. Third, political instability in Germany has weighed on the euro, following the collapse of Chancellor Olaf Scholz's coalition. EUR/USD bears are targeting support levels at 1.05243 and 1.04459.
EUR/USD traded lower during the Asian and early European trading sessions. Key events today include the US Producer Price Index (PPI) report at 1:30 p.m. UTC, followed by speeches from ECB President Christine Lagarde at 7:00 p.m. UTC and Fed Chair Jerome Powell at 8:00 p.m. UTC. The eurozone will also release employment and industrial production data at 10:00 a.m. UTC, which could add volatility. Key levels to watch are 1.05240 and 1.05700.
British Pound Falls for the Fourth Consecutive Day
The British pound (GBP/USD) declined for the fourth straight day, driven by a stronger US Dollar Index (DXY) after Donald Trump's election victory on 6 November. GBP/USD has dropped about 2.7% since then but seems to find support around 1.27000.
Implementation of the higher trade tariffs and stricter immigration policies by the new administration is expected to drive inflation higher. Thus, the Federal Reserve (Fed) may have to reconsider its plans for future rate cuts. The anticipated rise in government spending is also pushing up US Treasury yields, supporting the US dollar's value. According to Edison Research forecasts, Trump's party is expected to retain control of both chambers of Congress, granting him significant influence to advance his agenda. While trends don't persist indefinitely, a stronger US dollar will likely continue to exert downward pressure on GBP/USD.
GBP/USD has been trading sideways during Asian and early European sessions. Attention now turns to the upcoming US Producer Price Index (PPI) release today at 1:30 p.m. UTC. It's a leading indicator of consumer price inflation, accounting for most overall inflation. Thus, higher-than-expected PPI numbers could be bearish for GBP/USD, while weaker data may trigger a slight upward correction.