Gold is experiencing its most impressive monthly performance since March of the previous year, fueled by robust market sentiment and speculation surrounding the impact of American political decisions. Both gold and the dollar maintained their strength this week, following the Federal Reserve’s decision to hold interest rates and the European Central Bank’s anticipated rate cut. This analysis delves into the recent news and market rumors impacting major financial markets, with a specific focus on the XAUUSD and EURUSD currency pairs.
Table Content:
Federal Reserve Holds Rates, Inflation Concerns Linger
On January 29th, the Federal Reserve maintained its benchmark interest rate at the current 4.25-4.5% range, a move widely anticipated by market participants. The Fed emphasized the critical need for demonstrable progress on inflation before considering further rate reductions. According to CME FedWatch, the probability of another rate hold in March has now risen to approximately 85%.
The US job market remains relatively robust, and current economic indicators, including GDP, do not signal an impending recession. Notably, the Fed’s statement omitted its previous reference to progress towards the 2% inflation target. This omission suggests that the Fed might be interpreting the current inflationary pressures as a potentially sustained trend, rather than a temporary aberration.
European Central Bank Cuts Rates, Divergence with Fed Widens
The European Central Bank (ECB) implemented a single cut to its main refinancing rate, bringing it down to 2.9%. This action was also largely expected by the market. A further rate cut is anticipated at the ECB’s next meeting on March 6th. Headline inflation in the eurozone is currently half a percentage point lower than in the US, and the ECB projects a decline to 2% by year-end. This lower inflation rate provides the ECB with greater flexibility to reduce interest rates compared to the Fed. However, a significant divergence in interest rates between the euro and the dollar could potentially expose the euro to further depreciation.
Looming Tariff Threats Fuel Market Uncertainty
Recent announcements by the former US President regarding potential tariffs on Canadian, Mexican, and Chinese imports have introduced further uncertainty into the market. While the prospect of new tariffs is not entirely unexpected, the specific details regarding their magnitude and the targeted products remain crucial. Traders are keenly awaiting official announcements to assess the potential economic ramifications.
Euro-Dollar Struggles Below $1.05
The euro has weakened against the dollar in recent months, driven by diverging monetary policies and a less favorable economic outlook in the eurozone. Recent economic data releases, including job reports and GDP figures, have generally been negative for the eurozone, while the American economy appears comparatively stronger. The threat of new US tariffs has further weighed on market sentiment, although the precise impact on European products remains unclear.
From a technical perspective, the 50-day Simple Moving Average (SMA) has served as a key reference point. The EURUSD is currently testing a move below this level. While a previous attempt to break above $1.05 under overbought conditions proved unsuccessful, a retest of this area remains possible, particularly depending on the outcome of the upcoming Non-Farm Payroll (NFP) report. While parity against the dollar appears overly aggressive in the near term, a decline towards $1.02 seems more realistic in the coming weeks, given the significant market reaction observed at this level on January 13th.
Gold Rallies to $2,800, Consolidation Expected
Safe-haven assets, particularly gold, have gained popularity in 2025 amidst growing concerns surrounding potential new US tariffs. However, exceptionally strong overall market sentiment appears to be the primary driver of gold’s recent surge. The Fed’s decision to pause rate cuts and the generally positive economic conditions in the US present somewhat conflicting fundamentals for gold. Meanwhile, recent nervousness in equity markets has provided support for the precious metal.
Historically, when an asset reaches a significant new price level under conditions of strong sentiment, either continuation of the trend or consolidation is typically expected. A retracement is less likely in such a scenario. Consolidation appears to be the more probable outcome for gold at present, given its overbought condition based on both the slow stochastic oscillator and Bollinger Bands. Additionally, there hasn’t been a significant increase in buying volume or Average True Range (ATR).
The $2,720 level represents a clear candidate for static support, having previously served as resistance in the last quarter. Dynamic support could potentially emerge from the 20, 50, and 100 SMAs. While a substantial retracement lower seems unlikely for now, traders should closely monitor political developments in the US and the upcoming NFP report.
This article was originally published on FX Empire.
