The Gold
On Friday, gold prices increased by 1.50%, primarily driven by a drop in the US 10-year Treasury yield to 4.40%. Rising geopolitical concerns, particularly the potential escalation of the Russia-Ukraine conflict, fueled demand for gold as a safe-haven asset. US economic data presented mixed signals; while the PMI services and composite indices exceeded expectations, the PMI manufacturing index remained in contraction territory.
During the North American session on Friday, gold prices hit their highest point in two weeks as US Treasury yields declined. Geopolitical risks, especially surrounding the Russia-Ukraine war, continued to provide support for gold prices. The possibility of the conflict expanding into a direct confrontation involving the United States kept gold elevated. Moreover, ongoing uncertainty regarding Middle Eastern tensions, including the Israel-Lebanon situation, could potentially pave the way for a re-test of the historical high of XAU/USD at $2,790.
From a data perspective, the US economic calendar saw the release of the preliminary November S&P Global PMI indices. Both the services and composite indices expanded, outperforming expectations and surpassing October’s figures. However, the PMI manufacturing index, although improving above forecasts and last month’s readings, remained below the 50 threshold—indicating contraction. Additionally, the University of Michigan (UoM) reported an improvement in US consumer sentiment compared to the initial reading, with inflation expected to return to the Federal Reserve’s 2% target within the next 12 months.
Gold (XAU/USD) prices initially peaked at a three-week high around $2,721-$2,722 before declining during the Asian session on Monday, November 25. It appears that the five-day consecutive upward trend has now paused. US President-elect Donald Trump nominated Scott Bessent as Treasury Secretary, resolving one of the major uncertainties in the markets. Additionally, reports suggest that Israel is nearing a ceasefire agreement with Hezbollah in Lebanon, which has helped bolster investor confidence. This positive sentiment led gold to retreat to the lower end of the $2,600 range.
Furthermore, expectations that Trump’s proposed policies could reignite inflation and restrict the Fed’s ability to reduce interest rates further weighed on gold prices. Meanwhile, Bessent’s clear focus on controlling the budget deficit has reassured bond investors.
In this environment, if gold prices breach the $2,750 level, the next target would be the historical high of $2,790. A break above this could pave the way for a move towards $2,800 and potentially test the $3,000 mark, which Goldman Sachs considers the next major resistance.
Conversely, if XAU/USD falls below $2,700, it could trade within the $2,650-$2,700 range unless sellers break the $2,536 level, after which the price may move towards $2,500.
Key economic indicators this week include the Federal Reserve’s meeting minutes, October durable goods orders, and the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred gauge of inflation.
The Euro
Although the EUR/USD pair dipped below the significant psychological level of 1.05 on Thursday, weak PMI data led to further capitulation among buyers, resulting in a 1.5% drop in the euro.
All PMI indices for the Eurozone in November came in weaker than anticipated. The manufacturing PMI fell to 45.2, while the services PMI experienced a notable decline from 51.6 to 49.2. This pushed the composite PMI into contraction territory, marking only the fourth time this has occurred this year. These concerning developments suggest that the private sector will likely weigh on economic growth in the Eurozone during the fourth quarter. Germany’s services sector unexpectedly entered recession, dropping from 51.6 to 49.4, indicating a shift from growth to contraction. Germany’s composite PMI also dropped to 47.3, its lowest level since February.
Following the release of these reports, EUR/USD plunged to its lowest level in two years and continued to decline by another 1.8% this week. The outlook for the euro remains bleak, which only increases the appeal of the US dollar. Economic data from the Eurozone has raised the probability of further rate cuts by the European Central Bank (ECB) next year. The market is now expecting the ECB to reduce rates next month, with a 50-basis-point cut becoming more likely. Forecasts indicate that interest rates in the Eurozone could fall to 1.67% by October next year, down from the 1.80% seen last Thursday.
The two-year interest rate differential between the euro and the dollar (currently around 180 basis points) continues to be the primary driver behind the euro’s weakness against the dollar. This divergence in monetary policies is detrimental to the euro, with little support from the stock markets. In essence, even positive sentiment in financial markets has not been able to bolster the euro.
The sharp decline in EUR/USD brought the pair to 1.0330 (a 1.5% drop in under an hour), its lowest point in two years. Staying below the 1.05 level now exposes the pair to further downside risks and the possibility of another breakdown.
The Pound
UK PMI reports revealed declines in both the manufacturing and services indices, signaling the end of a 12-month growth streak. The manufacturing index fell further into contraction, reaching its lowest level since February. Although the services index remained above 50, indicating economic growth, it posted the weakest reading since October 2023. The larger-than-expected decline in the services index led the composite index into contraction, dropping to 49.9.
Following the PMI report, the probability of an interest rate cut in the UK in December rose to 14%, up from just 9% in recent weeks. Expectations for rate cuts in 2025 have also increased. The market now anticipates rates to fall to 4.15% by June next year, down from 4.19% last Thursday. UK bond yields have declined across the curve, though European bond yields have led this trend. The pound has reached its lowest level since May and is approaching the 1.25 USD mark. Currently, the pound is down 1.25% against the US dollar, and this week has posed significant challenges for the currency. There appears to be no strong impetus to
The Oil
Oil prices have experienced a notable surge in recent days. Brent crude rose to $74.8 per barrel on Friday, reflecting a 5% increase since the start of the week.
This week’s price spike is likely driven by the recent escalation of the war in Ukraine, which has now entered its 1,000th day. In recent days, Russia has intensified attacks on Ukraine’s energy and civilian infrastructure. In response, Ukraine has targeted Russian territory using long-range weapon systems supplied by other nations.
These developments have sparked concerns about potential disruptions to Russian energy supplies, particularly if Ukraine targets key refineries or export terminals in Russia—an issue that has occurred in the past. Recently, three refineries in Russia had to suspend or scale back operations due to reduced profit margins resulting from higher local crude oil prices and more difficult financing conditions.
Moreover, these refineries have been the target of Ukrainian drone strikes this year, further curtailing their processing capacities. The expectation of a decline in Russian diesel exports has caused the diesel crack spread to soar to nearly $19 per barrel this week.
Short-term forecasts point to upward risks for Brent oil prices, with the potential for a rise to the mid-$80s per barrel in the first half of 2025, should Iranian oil exports drop by 1 million barrels per day due to stricter sanctions enforcement.
However, medium-term projections suggest a decline in prices due to the ample spare capacity in the market.
Estimates indicate that if a 10% tariff is applied globally or if OPEC’s supply increases through 2025, Brent oil prices could fall to the low $60s per barrel by 2026.