Despite data showing softer US durable goods orders for November (falling 1.1% compared to the 0.3% gain in October), the USD resumed its winning ways’ as exhibited by the Dollar Index (DXY) reclaiming the 108 handle. This is because the messaging from the US Federal Reserve last week regarding inflation and interest rates remains fresh in investor’s minds, with the US central bank having increased their inflation forecasts for 2025 at the same time as they dialled back their own expectations for interest rate cuts next year. So, with the market now getting accustomed to a potentially higher interest rate environment for the US occurring in 2025, the USD is reaping the benefits.
The rise in the USD and bond yields contributed to the gold price easing back, with spot gold trading around the $2615 level during Asian trading hours on Tuesday. While gold has undoubtedly enjoyed a tremendous run higher during 2025 (having gained approximately 26% for the year), the strong finish to the year by the greenback has provided a headwind for the precious metal. As such, gold could be relying on some profit-taking setting in for the USD if it wants to start making a run back towards $2650 and beyond.
Oil is another asset which is not being helped by the surge in the USD. Commodities and precious metals which are priced in USD become more expensive to purchase for holders of foreign (i.e., non-USD) currencies. The WTI contract remains hovering below the $70 level, with the incoming Trump administration’s plans to increasing drilling adding to concerns that the market could be oversupplied rather than undersupplied during 2025.
US equities posted gains to start what is a shortened holiday-trading week. While a ‘Santa Claus Rally’ could still come to fruition, like we have become familiar with in recent years, it could be more muted in nature thanks to the Fed’s shift in stance last week on the direction of inflation. We have thin trading conditions due to the holiday period, and the lower-liquidity conditions can sometimes contribute to over-exaggerated market moves. So, let’s see if the market continues to maintain a mildly positive bias even though we may not see another rate cut from the Fed for several months (if at all next year).
For the rest of the week, the economic calendar looks quite thin owing to the holiday period. US jobless claims and crude oil inventories are due for release on Thursday (US time). While we will also see the Tokyo Core CPI data on Friday which could see some activity in the USDJPY rate if the result ventures far from the 2.5% figure expected. Overall, markets appear to be biding time as we await the transition of the Biden to Trump presidency in January 2025. From January 20th and onwards we will start to get more policy details about how things will look, particularly on the tariff front between the US and China.
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