Gold Bounces Back After Wednesday's Sell-Off
Gold (XAU/USD) price rose by just 0.24% during a very volatile trading session on Thursday. This modest increase followed the release of US economic data that strengthened beliefs that the Federal Reserve (Fed) will adopt a more gradual approach to monetary policy easing in the upcoming year.
Initially, XAU/USD rallied strongly and broke above $2,620, but the stronger-than-expected US Gross Domestic Product (GDP) report and labour data reinforced market expectations of a cautious approach by the Fed to rate cuts in 2025. Thursday's macroeconomic reports showed that the US economy expanded faster than expected in Q3, while jobless claims fell more than anticipated. Investors currently price in only a 44% chance that US interest rates will decline by another 25 basis points (bps) by mid-2025.
Still, a massive sell-off in Gold, which took place on Wednesday, has been viewed as an opportunity to go long.
"The short-term dip in gold presented a good buy-in opportunity for long-term stackers. You have the looming debt problem, the potential government shutdown, and we're already seeing the posture of the new administration in terms of trying to cut the expenses and minimise the deficits", said Alex Ebkarian, chief operating officer at Allegiance Gold.
XAU/USD was rising slightly during the Asian and early European trading sessions. Today, the main focus is on the latest US inflation figures. The US Bureau of Economic Analysis will publish the Personal Consumption Expenditure (PCE) report at 1:30 p.m. UTC. Given its potential to influence interest rates expectations and investors' sentiment, we expect sharp price movements in various financial instruments, including XAU/USD. Higher-than-expected results will likely bring the gold price down towards $2,575. Lower-than-expected figures will probably pull XAU/USD towards $2,620.
Euro Is Under Pressure as Fed and ECB Rate Cut Expectations Diverge
The euro (EUR/USD) gained 0.1% against the US dollar as the greenback continued to hover near a two-year high after the latest macro data supported the case for fewer rate cuts by the Federal Reserve (Fed) in 2025.
A fundamental bearish trend in EUR/USD remains intact. After a stronger-than-expected reading on US Gross Domestic Product (GDP) in Q3 and a smaller-than-expected increase in weekly unemployment claims, traders have lost faith in imminent rate cuts by the Fed. They now expect only one 25-basis-point (bps) rate cut over the next six months. Meanwhile, the market expects the European Central Bank (ECB) to deliver four rate cuts by mid-June 2025. This massive divergence in monetary policy expectations between the ECB and the Fed continues to exert downward pressure on EUR/USD.
"Since the election, interest rate expectations in the US have gone up, but outside the US, they've gone down whether you look at ECB or most other central banks. And that leads to dollar strengthening as those interest rate differentials widen in favour of the US So I think you should expect more dollar strengthening because I don't believe the interest rate markets or the currency markets have fully priced in the implications of tariffs", said Ronald Temple, chief market strategist at Lazard in New York.
At the same time, the economic picture in the eurozone remains murky. Yesterday's data revealed that consumer sentiment in Germany remains weak, while the eurozone current account surplus has declined towards a 10-month low.
EUR/USD was rising slightly during the Asian and early European trading sessions. Today's main event is the release of US inflation figures. The US Bureau of Economic Analysis will publish the Personal Consumption Expenditure (PCE) report at 1:30 p.m. UTC. The data may affect interest rates expectations and investors' sentiment, causing increased volatility in many financial instruments, including EUR/USD. Higher-than-expected results will likely drag EUR/USD towards 1.03300. Otherwise, the pair will likely rise towards 1.04000.
Bitcoin Declines Following the Fed Officials' Comments
BTC/USD fell by 8.35% after the Federal Reserve (Fed) cut the interest rate by 25 basis points (bps) and highlighted fewer rate cuts in 2025 than was previously expected. This has caused investors to shift away from riskier assets like cryptocurrencies and US stocks, triggering a big sell-off.
Beth Hammack, the President of the Cleveland Fed, voted to maintain interest rates at their current level. This decision was based on concerns about inflation, which is still above the 2% target and is expected to remain above this level until at least 2027. Jerome Powell, Chairman of the Fed, addressed this issue in a press conference on 18 December. He emphasised that the central bank doesn't own Bitcoin and has no intention of attempting to influence its legal status. Regarding the legal aspects of Bitcoin, Powell stated:
"That is a matter for Congress to decide, but the Federal Reserve is not seeking any changes".
Following his remarks, BTC/USD began to decline after a long upward trend fuelled by the election of Donald Trump in November.
The increase in demand for Bitcoin was primarily driven by expectations that the government might adopt a more laissez-faire approach to assets used primarily for speculation rather than for real-world transactions. Donald Trump has indicated a desire to establish a US strategic reserve of Bitcoins. However, he hasn't provided specific details on how this would be accomplished. Senator Cynthia Lummis, in a proposal, has suggested establishing such a reserve through legislation. Her plan calls for the Treasury Department to purchase 200 bitcoins annually until a total of one million are acquired. Fed deposits and gold reserves would be used to fund this initiative.
BTC/USD trades sideways within the $96,000–$98,000 range during Asian and early European trading hours. Today, the US Personal Consumption Expenditures (PCE) Price Index report comes out at 1:30 p.m. UTC. Stronger-than-expected data may trigger a further decline, while milder data may support BTC/USD.