Gold Climbs as Inflation Fears Ease and Geopolitical Risks Rise
Gold ( XAU/USD ) price rallied by 0.9% on Wednesday and closed above the important $2,700 level after the US inflation report aligned with market expectations.
Fundamental factors—safe-haven buying due to growing tensions in the Middle East and strong structural demand by global central banks—have contributed to the recent XAU/USD rally, which has risen by more than 6% over the month. However, technical chart-based buying has also been a significant driver for the price of gold, as a break above the weekly pivot level of $2,650 on Monday prompted gold bulls to target new highs. Additionally, Wednesday's US Consumer Price Index (CPI) data didn't show a pickup in inflation, which many investors had feared, allowing them to increase their long positions in gold.
Goldman Sachs, a leading investment bank, predicts an 11% increase in gold prices towards $3,000 by the end of 2025. However, their forecast is heavily based on the Federal Reserve's (Fed) monetary policy remaining dovish. ‘A higher for longer federal funds rate is the main downside risk to our $3,000 forecast. For instance, if the Fed cut by an additional 25 basis points only (which would likely also strengthen the US dollar), we estimate that the gold price would rise to only $2,890 by end-2025’.
XAU/USD dropped sharply during the Asian session but started to rise again in the early European hours. Thursday's main event is the US Producer Price Index (PPI) report due at 1:30 p.m. UTC. Although the report is less important than Wednesday's CPI, a surprisingly strong or weak figure may shake the market. The market expects the core PPI to rise by 3.2% in November. A higher-than-expected result may trigger a minor sell-off in XAU/USD. A lower-than-expected number may push the gold price even higher, possibly above $2,726.
"Spot gold may retrace into a zone of $2,673 to $2,687 per ounce, following its failure to break key resistance at $2,718", said Reuters analyst Wang Tao.
Diverging Monetary Policies Pressure Euro
The euro ( EUR/USD ) lost 0.3% against the US dollar (USD) on Wednesday as the greenback strengthened slightly after the US Consumer Price Index (CPI) data aligned the market forecasts.
Although yesterday's US CPI report aligned with investors' expectations, it nonetheless strengthened the prevailing opinion that the Federal Reserve (Fed) will implement a rate reduction next week. According to the CME FedWatch tool, traders currently price in a 99% probability that the Fed will cut its base rate by 25 basis points (bps), up from an 89% probability of such a move on 10 December. At the same time, investors are less optimistic about the future US interest rate path and price in a 56% probability that the base rate will remain above 4% by mid-March 2025.
Conversely, traders are much more confident that the European Central Bank (ECB) will pursue a dovish monetary policy. Interest rate swaps market data implies a 63% probability that the ECB will lower its key base rate towards just 2% by mid-March. A substantial divergence in monetary policy expectations between the ECB and the Fed remains a major bearish factor for the EUR/USD. Furthermore, the US dollar received an additional boost yesterday from a Reuters report. Analysts indicated that China considered allowing the Chinese yuan to weaken in 2025 to brace for higher trade tariffs in a second Donald Trump presidency.
EUR/USD was essentially unchanged during the Asian and early European trading sessions. Today, traders brace for the ECB interest rate decision due at 1:15 p.m. UTC. Investors expect a 25-bps rate cut but are more interested in the latest ECB Monetary Policy Statement, which may reveal important details about the interest rates path. Also, the ECB press conference at 1:45 p.m. UTC is important as Christine Lagarde, ECB President, may provide critical forward guidance that could significantly impact EUR/USD's trajectory.
British Pound Spiked On US CPI Data
The British pound ( GBP/USD ) rose on Wednesday after the US Consumer Price Index (CPI) data eased fears of higher inflation and US interest rates.
The CPI figures increased by 0.3% last month—marking the highest rise since April—aligning with forecasts of economists surveyed by Reuters. According to the CME's FedWatch tool, the probability of a 25-basis-point (bps) rate cut by the Federal Reserve (Fed) on 18 December increased towards more than 98.4% after the CPI report.
"The market is now almost certain that the Fed will reduce rates next week", says Marc Chandler, Chief Market Strategist at Bannockburn Forex. "Such a move would be unusual for the Fed to take, as it would contradict the current market expectations, given the high probability of a rate reduction already priced in by market participants", he added.
However, the Fed's future course of action remains uncertain. The available data suggests that the US still struggles to achieve its 2% inflation target, which could impact market expectations regarding future Fed policy easing. The core CPI figure is above its summer low at 3.2%. The headline CPI was rising from its 2.4% low in September and is now at 2.7%. According to Carol Kong, currency strategist with the Commonwealth Bank of Australia, the US dollar will likely remain strong as market pricing reflects concerns about a slower disinflation process, potentially leading to a more gradual rate-cutting cycle by the Fed next year.
GBP/USD moves sideways during Asian and early European trading hours. Today, market participants wait for the US Producer Price Index data due at 1:30 p.m. UTC to get more clues on the inflation rate. Softer-than-expected data may give the pair a bullish momentum, while higher-than-anticipated results will pressure GBP/USD.