Gold Grows On Geopolitical Instability And Chinese Gold Purchases
Gold ( XAU/USD ) touched the $2,650 level on Monday, driven by China's central bank resuming gold purchases after a six-month pause, renewed geopolitical tensions in the Middle East, and growing expectations of a US rate cut.
On Sunday, Syrian rebel forces successfully ousted President Bashar al-Assad, bringing to an end the 50-year rule of the Assad family and raising concerns about a potential new wave of unrest in the region. Additionally, the US nonfarm payroll report published on Friday indicated that the labor market is showing signs of gradual improvement, allowing the Federal Reserve (Fed) to consider reducing interest rates later this month.
Based on the CME FedWatch tool's projections, markets currently anticipate an 85.1% chance of a 25-basis-point rate reduction at the Fed's last meeting of the year on 18 December. This would lower the opportunity cost of holding non-interest-bearing assets like gold, making them more appealing to investors.
The resumption of gold purchases by the People's Bank of China (PBOC) in November may be a positive development for investors and may support gold prices. According to Yeap Jun Rong, a strategic analyst at IG, this move may stimulate Chinese investors' demand for gold, which has been dampened since the PBOC stopped its purchases in May. The decision to increase holdings of gold, particularly after the recent election of Trump, reflects the proactive approach of the PBOC in ensuring economic stability in light of changing global conditions, according to analysts at OCBC.
XAU/USD has been trading bullish during Asian and early European trading hours. No new events are expected to influence XAU/USD movements today.
Euro Weakens On Mixed US Jobs Data
The euro ( EUR/USD ) lost 0.17% against the US dollar (USD) during a very volatile trading session on Friday as traders digested a rather mixed US nonfarm payroll (NFP) report.
Following significant job losses due to hurricanes and strikes in October, US employment surged in November. Friday's NFP report showed that 227,000 jobs were created last month, more than the market expected. Nevertheless, a slight uptick in the unemployment rate towards 4.2% indicated a cooling labour market, which may lead the Federal Reserve (Fed) to reduce interest rates in December further. Although a rate cut seems imminent, investors are watching US Consumer Price Index (CPI) data this week for any additional clues.
"A hot US CPI print may not necessarily derail a cut at next week's FOMC meeting, but it would affect the level of implied cuts priced for FOMC meetings from March 2025 onwards, and this is where the US dollar may take its directional steer", said Chris Weston, head of research at Australian online broker Pepperstone.
Meanwhile, the sluggish eurozone economy and political uncertainty continue to weigh on the euro. The market currently prices in a 64% probability that the European Central Bank (ECB) will reduce its base rate to just 2.5% by 6 March 2025. At the same time, the market expects the US interest rate to remain close towards 4% by that time. This divergence in monetary policy expectations continues to favour the greenback and exerts downward pressure on EUR/USD.
EUR/USD was falling during the Asian and early European trading sessions. The macroeconomic calendar is rather uneventful today, so the established bearish trend will likely continue. Low volatility may also prompt traders to take profit on their short positions, which may lead to a temporary rebound in EUR/USD.
Australian Dollar Declines Ahead Of The RBA Interest Rate Decision
The Australian dollar ( AUD/USD ) declined by 1.87% by the end of the week as some investors bet the central bank officials would sound more dovish at the monetary policy meeting this week.
Tomorrow's Reserve Bank of Australia (RBA) monetary policy meeting stands out among other central banks' meetings. The RBA is expected to oppose the global trend of lowering interest rates by keeping the rates unchanged at 4.35%. The central bank has been supporting the rate for over a year, but markets anticipate an earlier rate cut in 2025 following a disappointing economic performance in the previous quarter. There is now a 55% probability that the RBA will lower interest rates in February. If the employment data coming out on Thursday is weak, it may increase the likelihood of a 25-basis-point (bps) cut in February to approximately 75%. Meanwhile, a potential rate cut in April is almost fully priced in. Also, several RBA officials will deliver speeches this week, which may add volatility to AUD/USD.
With the Federal Reserve (Fed) anticipated to reduce interest rates by 25 basis point next week, analysts suggest that the US dollar (USD) might be weakening after its long growth in the four weeks following the election of Donald Trump. Morgan Stanley analysts have even recommended shorting the US dollar until the end of the year, describing it as a risky investment for traders heavily invested in the currency. According to their analysis, the optimistic outlook for USD is primarily based on price factors, such as strong US economic data, trade, and fiscal risks, all of which favour the greenback. Nevertheless, they feel that investor sentiment toward the US dollar is generally favourable, indicating that there may be an asymmetric risk of ‘unfavourable consequences’ if the situation changes.
AUD/USD continued to decline during Asian and European trading hours. Market participants are waiting for the RBA rate decision, which will be released tomorrow at 3:30 a.m. UTC, and the RBA Press Conference at 4:30 a.m. UTC, where officials will give more clues on future interest rate trajectory.