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Gold and EUR/USD FX diverged last week after 4 months of highly correlated co-movement (Figure 1), amid geopolitical tensions and concerns related to China’s recession fears and mixed US labor data. Gold futures rose to $2,685/ounce, a record high, extending its strong momentum despite the sharp increases for the US dollar and Treasury yields across the curve as markets assessed global demand for safe-haven assets and the monetary policy outlook for major Central Banks. Bullion assets were also supported by investors divesting from riskier assets in major Chinese capital markets. This was due to the underwhelming fiscal response to the ongoing property crisis by Beijing’s housing ministry, which triggered sharp losses for equities in distressed sectors of Asia’s largest economy ahead of tomorrow’s GDP print. Recently, investors have scaled back expectations for the magnitude of further US rate cuts, as monthly jobs reports and consumer inflation data exceeded expectations, though rising weekly jobless claims and slowing producer inflation provided a counterpoint. |
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Figure 1: EUR/USD front month, gold COMEX front month The Euro approached $1.08, a new low since early August, after the ECB lower borrowing costs by 25bps as expected during its October 2024 meeting, with President Lagarde saying the decision was unanimous. The move follows similar cuts in September and June, bringing the key deposit rate to 3.25%, the lowest since May 2023. At the same time, policymakers reinforced their guidance, reiterating their commitment to maintain restrictive policy rates until the 2% inflation goal is achieved. The central bank also said it will continue to follow a data-dependent and meeting-by-meeting approach to determining the appropriate level and duration of restriction. Inflation in the Eurozone was revised lower to 1.7% in September, falling below the ECB’s target of 2% for the first time in more than three years. Markets are now anticipating further 25bps cuts at each meeting until the deposit rate reaches 2% by July. |