Gold moves sideways ahead of the US interest rate decision
Gold (XAU/USD) held above the $2,650 support level on Monday ahead of the Federal Reserve (Fed) interest rate decision as market participants assessed the monetary policy outlook for 2025.
The Fed is anticipated to lower interest rates by 25 basis points, bringing the range to 4.25–4.5%. However, there is uncertainty about the extent of future reductions, particularly in light of the prospect of higher inflation under the new administration. The latest S&P Global Flash Purchasing Managers' Indices (PMIs) data revealed that US private sector activity expanded faster in December. This suggests that the Fed may limit rate cuts in the coming year, which could dampen demand for the precious metal. A surge in service industries primarily drove the growth, while the manufacturing sector continued to struggle. Still, XAU/USD has gained about 29% this year, positioning for its largest annual gain since 2010. The rise has been driven by US policy easing, strong demand for safe-haven assets, continued global central bank purchases, and geopolitical tensions.
XAU/USD continues to hold above the $2,650 support level during Asian and early European trading hours. The US Retail Sales report will come out at 1:30 p.m. UTC and may affect gold. Higher-than-expected numbers will bring the pair below the $2,650 support level, while softer data will ease the pressure on the pair.
Euro Gains Ground Amid Political News and Anticipation of the Fed Meeting
The euro (EUR/USD) gained 0.33% on Monday despite the US Dollar Index (DXY) remaining near a three-week high as traders awaited the Federal Reserve (Fed) meetings this week for clues on the possible interest rate path in 2025.
Yesterday, the euro was bombarded with a series of political and economic news. First, Olaf Scholz, German Chancellor, lost a parliamentary confidence vote, meaning that Germany will now hold snap federal elections as early as February. Typically, the market doesn't like political uncertainty, but traders viewed the news as positive because it would allow the establishment of a new and possibly more effective government. Second, eurozone Purchasing Managers' Indices (PMIs), released by S&P Global, were generally better than expected. The services industry grew and offset a long-running contraction in the manufacturing industry.
At the same time, Christine Lagarde, the European Central Bank (ECB) President, said on Monday that the ECB will cut interest rates further if inflation continues to ease towards its 2% target. Overall, EUR/USD is at a crossroads, and this week's Fed decision and US inflation data will play a key role in determining the pair's direction for the rest of the year. The markets are certain the Fed will announce a 25-basis-point cut at its policy meeting on Wednesday. The CME's FedWatch tool puts the probability of such a cut at almost 97%. 'I don't think the debate is whether the Fed cuts or not; it's always about forward outlook', said Eugene Epstein, head of structuring for North America at Moneycorp.
EUR/USD was falling during the Asian and early European trading sessions. The US Retail sales report, due at 1:30 p.m. UTC today, may add some volatility to all USD pairs. Higher-than-expected figures may push EUR/USD towards 1.04740. Conversely, lower-than-expected results may pull the pair above 1.05340.
Australian Dollar Stays Low Ahead of the US Interest Rate Decision
The Australian dollar (AUD/USD) held steady on Monday, as the near-term outlook for the currency depended on the prospects for US interest rates. The US Dollar Index (DXY) decreased towards approximately 106.7, as investors took a cautious approach ahead of the highly anticipated Federal Reserve's (Fed) meeting.
This week's key event is the Fed policy meeting on Wednesday. The US central bank is expected to lower interest rates by 25 basis points (bps), bringing the range to 4.25–4.5%. The most significant data of the meeting will be the guidance on future easing measures. Due to concerns about the potential resurgence of inflation, especially with Donald Trump's impending return to the White House, market expectations for additional reductions in 2025 have decreased. Futures indicate only two rate reductions the next year. Also, the latest S&P Global Flash Purchasing Managers' Indices (PMIs) data revealed stronger-than-expected growth in private sector activity this month. Service industries strengthened while the manufacturing sector continued to struggle.
In Australia, a recent Westpac survey indicated a decrease in consumer confidence during December, with a more pessimistic outlook on the overall economic situation. Also, market participants are awaiting the Australian government's budget announcement, which is anticipated to reveal larger fiscal deficits. Weakened economic activity in China, Australia's largest trading partner, has contributed to the deficits. On Tuesday, the three-year government bond yield fell by 4 bps, towards 3.84%, following an upward trend for four consecutive weeks. The ten-year bond yield also declined by 2 basis points, towards 4.3%.
AUD/USD continues to move sideways within a range of 0.63500–0.63800 during Asian and early European trading hours. The US Retail Sales report, coming out at 1:30 p.m. UTC, may affect AUD/USD today. Higher-than-expected data may push the pair downwards towards 0.63500, while softer data may support AUD/USD.