Gold Rises on Geopolitical Risks
Gold (XAU/USD) has been rising for three consecutive days, gaining 0.69% yesterday.
Geopolitical risks linked to the Russia-Ukraine conflict remain a key driver of gold's upward trend. Tensions escalated when Ukraine got permission to use long-range missiles, and, in response, Russian President Vladimir Putin lowered the nuclear strike threshold, boosting demand for gold. A weaker US dollar (USD) further supported the bullish trend in XAU/USD.
In the US, investor sentiment suggests that expansionary policies proposed by President-elect Donald Trump may lead to increased inflation and force the Federal Reserve (Fed) to stop reducing interest rates. A member of the Fed Board of Governors, Lisa Cook, warned that a slowdown in inflation decline could lead to a pause in further rate reductions. Another Fed member, Michelle Bowman, said that progress in combating inflation has slowed and that the central bank should adopt a cautious approach to monetary policy. According to CME's FedWatch Tool, there is a 50% chance that the Fed won't reduce interest rates in December.
XAU/USD was testing the $2,650 resistance level and continued rising during the Asian session, reaching a 1.5-week high. If the pair manages to hold above the resistance, it could rise further towards $2,700 or higher. Alternatively, if the price pulls back from the resistance, a sideways movement may be expected.
Euro Could Rebound as the Market Is Likely Mispricing Fed Rate Cuts
The euro (EUR/USD) lost 0.49% against the US dollar (USD) on Wednesday as the US Dollar Index (DXY) renewed its post-election rally after a three-session decline.
Overall, EUR/USD is down more than 3.5% as the US presidential election prompted investors to expect fewer rate cuts from the Federal Reserve (Fed). They suggest that Donald Trump's policies would be inflationary, leading to a tighter monetary policy. However, there is a risk that the rally in DXY is overdone. ‘There's a lot of pessimism about Fed rate cuts that we think is misplaced. The rest of the world, except for Japan, has to cut because they have zero growth, basically, and without the US, they'd be in a recession. Everybody is super-bearish, in our opinion too bearish, about Fed cuts’, said Jay Hatfield, CEO at Infrastructure Capital Advisors in New York. In other words, the market sentiment isn't balanced right now, which increases the risk of a sharp upward correction in EUR/USD. According to CME's FedWatch Tool, markets are pricing in a 52% chance of a 25-basis-point cut at the Fed's December meeting, down from 82.5% a week ago.
At the same time, the market is a lot more optimistic about the rate cuts in the eurozone. Interest rate swaps market data implies a 49% probability that the European Central Bank (ECB) would reduce its base rate to just 2% by mid-2025. In addition, there is a growing risk that potential global trade tensions will damage the eurozone economy, which is predominantly export-based. Thus, investors lack strong reasons to buy and hold the euro.
EUR/USD was relatively flat during the Asian and early European trading sessions. Today, the market will get more clues on the state of the US economy from the latest weekly Jobless Claims report at 1:30 p.m. UTC and Existing Home Sales data at 3:00 p.m. UTC. Better-than-expected results will likely trigger another sell-off in EUR/USD, potentially pushing the pair towards a multi-month low. Conversely, worse-than-expected results may pull EUR/USD above the 1.05800 level.
British Pound Continues to Move in a Downtrend
The British pound (GBP/USD) lost 0.25% on Wednesday as rising geopolitical tensions offset the impact of a topside U.K. Consumer Price Index (CPI) data.
The escalation of tensions between Russia and Ukraine led to increased volatility in currency markets in the past two trading sessions, resulting in erratic price movements. GBP/USD fell towards session lows following reports that Ukraine fired missiles into Russian territory. Despite this, market movements have been relatively contained so far. With the latest inflation data showing services CPI aligning with the Bank of England's (BOE) projections, the impact on the policy outlook was minimal, supporting the case for a 25-basis-point rate cut by the BOE.
After a decline, the US dollar (USD) started to grow again, approaching a one-year high. The US dollar gained over 2% after the presidential election. People expect Trump's new policies to accelerate inflation, so the Federal Reserve (Fed) might not lower interest rates anytime soon. At the same time, everyone's thinking about what Trump's tariff plans mean for other countries. Europe and China will likely feel the impact of implementing these tariffs. It's hard to bet against the US dollar right now, according to Matt Simpson from City Index. People are also wondering if the Fed will still cut rates next month. There's about a 54% chance of the Fed reducing rates at the next meeting in December, down from 82.5% just a week ago, according to CME's FedWatch Tool.
GBP/USD has been moving sideways Thursday morning. Today, market participants will be waiting for the US Jobless Claims report at 1:30 p.m. UTC. Analysts expect the data to grow from 217,000 towards 220,000. If the numbers are higher than expected, they may support GBP/USD. Otherwise, the downtrend in the pair will likely continue.