Market sentiment improved mid-week as tensions eased between the US and the EU. The Bureau of Economic Analysis is about to update the US’s third-quarter GDP and release PCE Price Index figures for two months. Weekly Initial Jobless Claims data is also in focus. On Wednesday, positive market trends emerged, bolstered by tariff agreements with European nations, causing Wall Street indices to rise by over 1%. The US Dollar (USD) fell against main currencies, especially the New Zealand Dollar. In contrast, the Australian Dollar (AUD) benefited from a reduction in the Unemployment Rate to 4.1% in December, leading to a 0.7% increase in AUD/USD, reaching levels not seen since October 2024. Meanwhile, EUR/USD stayed under 1.1700, and GBP/USD remained above 1.3400.

Inflation And Its Impact On Currencies

Inflation affects currencies. High inflation can strengthen currency values as interest rates rise to control inflation. For Gold, higher interest rates decrease its appeal compared to interest-earning assets. However, lower rates make Gold more attractive. These inflation trends influence foreign exchange and gold prices, affecting global capital flows. Looking back to this time in 2025, the market reacted positively to easing US-EU trade tensions. Today, the focus has shifted from trade news to central bank policies. Interest rate differences are now more important than tariff discussions. In January 2025, traders were keenly watching key US data like the PCE Price Index. Now, the emphasis is sharper, as core inflation remains at 2.8%, above the Fed’s target. With initial jobless claims steady around 210,000, it indicates a tight labor market that prevents rate cuts, supporting dollar strength.

Currency And Gold Market Trends

In January 2025, AUD/USD surged past 0.6800 after a strong jobs report showed unemployment at 4.1%. However, that rally was brief, and now Australian unemployment is rising towards 4.5%. This change suggests options traders might consider buying puts on the AUD/USD, as positive economic conditions from a year ago have diminished. A year ago, EUR/USD was consolidating below 1.1700, but economic differences with the US have pushed it lower. The European Central Bank is talking about rate cuts to stimulate a sluggish economy, contrasting sharply with the Federal Reserve’s position. We see a similar situation with GBP/USD, indicating that any rises in these pairs might be a good time to take new short positions. Gold reached an impressive high of nearly $4,890 last year, but its performance since has been disappointing. With the Fed adopting a ‘higher for longer’ approach to interest rates to combat stubborn inflation, the cost of holding non-yielding gold has risen significantly. Hence, we expect continued pressure on XAU/USD, making short positions or selling call options a smart strategy in the weeks ahead. Create your live VT Markets account and start trading now.

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