Gold Rises Ahead of Donald Trump's Inauguration
On Friday, gold (XAU/USD) increased by 0.74%, as the uncertainty regarding the policies of the incoming Donald Trump administration boosted the appeal of safe-haven assets. The rise occurred despite stronger-than-anticipated US labour data, supporting the expectation that the Federal Reserve (Fed) may not decrease interest rates significantly this year.
The price of gold dipped briefly towards $2,663 after the nonfarm payroll (NFP) report showed 256,000 jobs added last month, exceeding the expected increase of 160,000. The unemployment rate stayed at 4.1%, matching the forecast of 4.2%. Traders now expect the Fed to lower interest rates by only 27 basis points (bps) this year, down from the previous forecast of around 45 bps rate cuts. Still, XAU/USD quickly recovered and reached its highest level since 12 December, indicating a potential weekly increase of more than 1.7%. 'Gold's price movement indicates a lack of sellers willing to sell the metal, a sentiment reinforced by the significant rise last year', said Tai Wong, an independent metals trader.
Despite a stronger-than-expected US employment report, gold remained steadfast. One reason for gold's resilience may be the uncertainty surrounding President-elect Donald Trump's inauguration. David Meger, Director of Metals Trading at High Ridge Futures, explains:
"With the inauguration of President-elect Trump on 20 January approaching, investors are concerned about his plans to impose tariffs on a wide range of imports. This could lead to inflation and restrict the ability of the Fed to reduce interest rates".
XAU/USD was moving sideways during Asian and early European trading hours. No significant events that may affect the market are expected today. 'Spot gold may retest resistance at $2,700 per ounce, a break above which could open the way towards $2,707–$2,715 range', said Reuters analyst Wang Tao.
Euro Plunges on Diverging Monetary Policies' Outlooks
The euro (EUR/USD) lost 0.52% against the US dollar (USD) and closed at a 26-month low on Friday after a better-than-expected US nonfarm payroll (NFP) report pulled US Treasury yields and the greenback higher.
US job growth surged unexpectedly last month, with the unemployment rate dropping towards 4.1%, signalling a robust labour market at year's end. This led traders to reduce further their expectations of interest rate cuts by the Federal Reserve (Fed) this year. Furthermore, worries that Donald Trump's proposed import tariffs, tax cuts, and immigration restrictions could fuel inflation additionally reinforce the expectation of a less aggressive easing cycle. Indeed, the market currently prices in an almost 70% chance that the US base will remain unchanged through May 2025, with the probability of a 25-basis-point (bps) rate cut in June just under 50%.
Meanwhile, traders have a totally different outlook on the European Central Bank's (ECB) monetary policy. They expect the ECB to deliver at least two additional 25-bps rate cuts by mid-April 2025. This massive divergence in interest rate expectations exerts downward pressure on EUR/USD. However, the pair has already lost some 9% since the end of September 2024, and some traders are starting to believe that EUR/USD may be undervalued, at least in the short term.
EUR/USD continued to fall during Monday's Asian and early European trading sessions. Today's formal macroeconomic calendar doesn't feature any prominent events that could trigger a substantial move in EUR/USD. Thus, traders may use this opportunity to take profit and close their short positions. As a result, a technical short-term rebound in EUR/USD is possible. The support at 1.01970 and the resistance at 1.02540 are key levels to watch.
Japanese Yen Declines Due to Strong US Labour Data
USD/JPY declined by 0.25%, while the US Dollar Index (DXY) surged on Friday following the nonfarm payroll report release. The data indicated a higher-than-anticipated number of jobs added in the previous month, reinforcing expectations of less dovish monetary policy by the Federal Reserve (Fed).
The US dollar (USD) value increased after the Department of Labor announced that the US economy added 256,000 new jobs in December, significantly surpassing the forecast of 160,000. Strong employment data indicates there is no need for the Fed to reduce interest rates rapidly. Jane Foley, Chief FX Strategist at Rabobank in London, stated that the Fed will likely reduce interest rates only once this year.
However, if President Donald Trump's policies are implemented promptly, the chances for interest rate reductions may be lost entirely. During his presidential campaign, Trump suggested introducing tariffs, lowering taxes, and implementing a deportation of immigrants, which could potentially lead to rising inflation.
The University of Michigan's consumer sentiment survey revealed increased inflation expectations, strengthening the US dollar. The report indicated that one-year inflation expectations rose towards 3.3% in January—the highest since May—up from 2.8% in December. Following the release, the market has started to anticipate a pause in the easing cycle at the January meeting. Analysts now expect only a 27-basis-point (bps) reduction in interest rates throughout 2025. They believe the next rate cut will likely occur at the June meeting.
Meanwhile, recent events in Japan, such as the potential for continued wage growth and the impact of a weaker Japanese yen on imported prices, have drawn the attention of central bank officials to increasing inflationary pressures. These developments have led to speculation that the central bank may adjust its price forecast upward this month.
During the Asian and early European trading hours, USD/JPY continued its downward correction, which had started on Friday. Today, Respect for the Aged Day is celebrated in Japan, so analysts expect low volatility in JPY-related pairs and the continuation of previously established trends.