Positive News From the Middle East Brought Down Gold
Gold (XAU/USD) reached the resistance level of $2,740 on Friday, rocketing by 1.74%. However, the price has decreased sharply by more than 1.5% during Monday's Asian trading session. XAU/USD is now testing the support level at $2,660.
Several factors have contributed to the XAU/USD decrease on Monday. First is the appointment of Scott Bessent as the new Treasury Secretary by Donald Trump, which removed a major source of uncertainty for the markets. Second is the growing expectation that Trump's policies may lead to increased inflation, limiting the Federal Reserve's (Fed) ability to lower interest rates further. Recently, comments from the US central bank regarding inflation in December have become more hawkish. The CME FedWatch tool suggests that traders expect the Fed to reduce interest rates by 25 basis points next month, with a probability of around 55%.
Another factor pressuring Ggold prices is news that Israel is nearing a ceasefire agreement with the militant group Hezbollah in Lebanon. Although the agreement has not yet been finalized, both sides in the conflict seem to be close to reaching an agreement, according to media reports. Possible de-escalation of the long-standing conflict in the Middle East has boosted investor confidence at the beginning of the new week, damaging the appeal of safe-haven gold.
Given the potential for easing conflict in the Middle East, gold could reverse its underlying upward trend and continue to decline. If XAU/USD drops below the support levels of $2,660 and $2,640, it could potentially reach $2,600 or lower. Alternatively, the price could rebound towards $2,700.
Euro Suffers From Strong US Economy
The euro (EUR/USD) lost 0.53% against the US dollar during a very volatile trading session on Friday.
EUR/USD was down by more than 1.3%, hitting 1.03310—a two-year low. The pair slightly recovered but finished the day with losses. The primary driver of EUR/USD's decline is the growing divergence in monetary policy expectations between the European Central Bank (ECB) and the Federal Reserve (Fed), driven by the very different state of the eurozone and the US economies. Indeed, HCOB's preliminary composite eurozone Purchasing Managers' Index (PMI) dropped to a 10-month low of 48.1 in November, showing a contraction and being the 50 estimate. In contrast, S&P Global said the flash US Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 55.3 this month—the highest level since April 2022. The US PMI rose from 54.1 in October, with the services sector proving the most of the increase. ‘It highlights the two-track world. It's the US versus the rest’, said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls.
In other words, the US economy is marching forward while the rest of the industrialised nations are falling behind. Thus, the US monetary policy is more likely to remain tighter than the eurozone's. Therefore, US interest rates will likely remain higher, exerting downward pressure on EUR/USD. Another reason for the pair's weakness is growing safe-haven flows into the US dollar amid rising geopolitical instability fueled by escalating Eastern European conflict.
EUR/USD was flat during the Asian and early European trading sessions. Monday's German Ifo Business climate report, due at 9:00 a.m. UTC, may add some volatility, but the macroeconomic calendar is rather uneventful. As long as EUR/USD remains above 1.04510, the short-term trading bias will remain bullish. However, the fundamental trend is decidedly bearish, and investors will likely continue to sell the rallies in EUR/USD until the pair rises above 1.06100.
Japanese Yen Moves Sideways for the Second Week
The Japanese yen (USD/JPY) has been trading in a sideways range on Friday and throughout the week. On Monday, the US Dollar Index (DXY) declined by 0.5%, pulling back from two-year highs, following the announcement by the US President-elect Donald Trump that he has nominated hedge fund manager Scott Bessent as a Treasury Secretary.
Bessent has expressed support for Trump's tariff and tax reduction proposals, but the market anticipates that he will prioritise economic and market stability above swift policy changes. Investors are eagerly awaiting this week's release of the minutes from the latest Federal Open Market Committee meeting, the Personal Consumption Expenditures (PCE) inflation report, and other economic data to assess expectations for future decisions regarding interest rates. Last week, the value of the US dollar (USD) reached its two-year high, driven by expectations that Trump's policies would lead to increased inflation, reducing the Federal Reserve's (Fed) ability to lower borrowing costs.
In the past seven days, economic statistics from Japan haven't provided a clear indication of the future direction of monetary policy. However, Kazuo Ueda, the governor of the Bank of Japan, indicated the possibility of another interest rate increase in December, citing concerns about the recent decline in the yen's value. Additionally, it has been reported that Prime Minister Shigeru Ishiba's administration is considering a stimulus package worth $90 billion to help households cope with the effects of rising prices.
USD/JPY has been trading sideways during Asian and early European trading hours. On Monday, no major releases that may affect the pair are expected.