Gold Faces Mixed Signals: Higher Tariffs and Geopolitical Risks
Gold ( XAU/USD ) rose by 0.48% on Friday, boosted by a drop in the US Dollar Index (DXY). Still, XAU/USD has been set for its worst monthly loss since September last year due to a sell-off driven by Donald Trump's win.
Gold dropped 3% in November, its worst monthly decline since September 2023, as expectations of big fiscal spending and higher tariffs lifted the US dollar and stalled gold's rally. Gold has been supported by geopolitical risks and Federal Reserve (Fed) interest rate reductions. Still, it's now facing pressure as increased tariffs may exacerbate inflationary pressures, potentially prompting a more cautious approach to future rate cuts.
"It's uncertain, as of now, how Trump's pledged tariffs will play out. However, the uncertainty of the matter, the tariffs that could prompt a slowdown in economic growth could actually be beneficial for the gold market from a safe-haven basis", said Jim Wyckoff, a senior market analyst at Kitco Metals.
XAU/USD was falling during the Asian and early European trading sessions. However, the general macro environment benefits gold as global central banks are still expected to cut the rates rather than raise them, while geopolitical risks aren't going away.
"Persistent global uncertainties continue to drive demand for gold as a safe-haven asset", said Ole Hansen, head of the commodity strategy at Saxo Bank.
Today, the release of the US ISM Manufacturing Index at 3:00 p.m. UTC may add volatility to XAU/USD. Higher-than-expected figures may push the pair slightly lower, while lower-than-expected results may pull XAU/USD towards the $2,660 level.
"Spot gold may fall into a range of $2,593 to $2,607 per ounce", said Reuters analyst Wang Tao.
Euro Continues to Be Under Bearish Pressure
The Euro ( EUR/USD ) gained 0.29% against the US dollar (USD) on Friday but continued to trade below the important 1.06000 level.
Overall, EUR/USD lost approximately 3% in November, which is the worst monthly performance since April 2022. A rally in the US Dollar Index (DXY), driven by strong US economic performance and expectations that US President-elect Donald Trump's policies will be inflationary, was the primary driver for the euro's decline. At the same time, the eurozone's economy is in a precarious state, which exerts additional downward pressure on EUR/USD.
While French Consumer Price Index (CPI) data for November aligned with forecasts, German inflation unexpectedly stagnated. Moreover, Francois Villeroy de Galhau, the European Central Bank (ECB) board member, suggested a more significant interest rate reduction at the next monetary policy meeting, contrasting with the hawkish tone adopted by his colleague, Isabel Schnabel. The market currently prices in more than a 75% chance of a 25-basis-point (bps) rate cut by the ECB next week. At the same time, the chances of a similar reduction by the Federal Reserve (Fed) stand at just around 60%.
EUR/USD was falling during the Asian and early European trading sessions. Political uncertainty in France as the government fails to agree on the budges is weight on the single currency. Later today, traders should focus on the US ISM Manufacturing Index, due at 3:00 p.m. UTC. Higher-than-expected results may additionally damage EUR/USD and push it down towards 1.04660. Conversely, lower-than-expected figures may temporarily pull the pair towards 1.06000 again.
Japanese Yen Closed the Week at Its Lows
The Japanese Yen ( USD/JPY ) declined by 3.26% last week and closed just below the crucial 150.000 support level.
Over the past weekend, the Bank of Japan's (BOJ) Governor Kazuo Ueda stated that the next interest rate increases are imminent, as economic data is positive. On Monday, Japanese data revealed robust business investment in Q3, growing at a healthy 8.1%. This trend encouraged markets to anticipate a 63% probability of a 25-basis-point (bps) rate increase towards the base rate of 0.5% at the next BOJ meeting scheduled for 18–19 December. Also, Christian Keller, an economist from Barclays, said that data on workers' pay this week will show more growth. He thinks there will be another big wage increase in February and stated that the wage growth and inflation pace show that the bank can raise rates again. But it's unclear when the BOJ will deliver the rate hike, in December or January.
The US dollar (USD) continued to rise on Monday, at the beginning of a crucial week for prospects of US interest rate cuts. Also, the incoming US president, Donald Trump, unexpectedly shifted in tone over the weekend. He demanded that BRICS members commit not to create a new currency or support another one that could challenge the US dollar's dominance, threatening countries with 100% tariffs on their goods. Now, the market will focus on Friday's nonfarm payroll report. Forecasts indicate a rise in newly created jobs at around 195,000, following the weather-affected October report, which may be revised in light of a low response rate to that survey. Based on the CME FedWatch tool, market participants expect a 67% probability of significant interest rate reduction, although they only anticipate two more reductions for 2025 at this point.
USD/JPY has been growing during Asian and early European trading hours. Today, market participants will be closely monitoring the US ISM Manufacturing PMI report at 3:00 p.m. UTC. A higher-than-expected reading may push USD/JPY higher, while softer data will put additional bearish pressure on the pair.