- The US Federal Reserve will meet on Wednesday and likely cut rates by 25-bps.
- Gold has had a bullish year partly due to anticipation of lower borrowing costs in the US.
- US retail sales increased by 0.7% in November, higher than the forecast of 0.6%.
Gold prices eased ahead of the FOMC meeting, where policymakers might forecast a more gradual easing cycle in 2025. At the same time, downward pressure came from a rally in the dollar and Treasury yields after upbeat US retail sales data.
The US Federal Reserve will meet later and likely cut rates by 25-bps. Markets are pricing in a 95% chance of such an outcome. Ideally, a rate cut should boost gold, which becomes more attractive. However, investors have already priced in the move. Moreover, the focus is now squarely on the outlook for rate cuts in 2025.
Gold has had a bullish year partly due to anticipation of lower borrowing costs in the US. High rates increase the opportunity cost of holding the non-yielding metal. Therefore, the start of rate cuts in September brightened the future of the yellow metal. However, since then, the outlook has slowly shifted due to a resilient economy and the looming Trump administration.
US retail sales (Source: Census Bureau)
The US economy has remained resilient, with data showing a strong labor market and resilient demand. Notably, data on Tuesday revealed that retail sales increased by 0.7% in November, higher than the forecast of 0.6%. This was a clear indication that consumer spending was stronger than economists expected. Fed policymakers have shifted from their dovish tone at the start of the central bank’s easing cycle. As 2024 ends, policymakers have taken a more cautious stance, calling for a gradual cycle in the new year.
Another reason for the shift in sentiment is the looming change in US leadership. Donald Trump won the election in November, which clouded the outlook for gold prices. His policy proposals might boost the economy in the coming year, reheating inflation.
Trump has proposed tax cuts to improve the business environment. At the same time, he has proposed tariffs that will boost demand for local goods. As a result, analysts predict higher inflation in 2025, which will probably lead to a pause in rate cuts. Markets are only pricing a 16% chance of a rate cut in January.
Traders will also watch US GDP data due on Thursday and inflation figures on Friday that will continue shaping the outlook for US monetary policy in 2025.
