Gold Nears $2,790 as Markets React to Trump's Policies (27-31 January)

The DXY fell sharply as markets reassessed President Trump’s pro-inflationary policies. At the World Economic Forum, he reiterated plans to boost energy production and ease regulations, while avoiding mention of China tariffs, easing inflation risks.

The Euro rose to $1.05 as Trump’s softened stance and rate-cut call weakened the dollar. Eurozone PMIs showed recovery, and the ECB is expected to cut the deposit rate by 25bps next week.

The yen strengthened as the BOJ raised rates by 25bps to 0.5%, the highest in 16 years, with inflation projected to hit 2%. Japan’s core inflation reached 3%, while manufacturing contracted for a seventh month but services grew.

Gold hit $2,770 per ounce, nearing its record high, driven by a weaker dollar, Trump’s rate-cut call, and weaker US PMI data. Silver climbed above $30.70 per ounce, supported by industrial demand and supply concerns.

Japan’s 10-year bond yields rose to 1.22%, China’s ended lower, and US yields remained flat.

Initial Jobless Claims

For the week ending January 18, seasonally adjusted initial jobless claims increased by 6,000 to 223,000, compared to the prior week’s 217,000. The 4-week moving average rose by 750 to 213,500.

The insured unemployment rate remained steady at 1.2% by January 11. Insured unemployment rose by 46,000 to 1,899,000, the highest since November 2021 (1,974,000). The prior week’s total was revised down to 1,853,000. The 4-week moving average for insured unemployment increased by 500 to 1,865,750, after a downward revision of the previous week’s average to 1,865,250.

BoJ Interest Rate Decision

The Bank of Japan (BoJ) increased its key short-term interest rate by 25bps to 0.5%, the highest level in 17 years, with wage growth and inflation trends. This marks the third adjustment since it ended its negative rate policy in March 2024. The decision, passed by an 8-1 vote with Nakamura dissenting, hints at potential further tightening if economic conditions meet expectations.

In its quarterly outlook, the BoJ raised the FY 2024 core inflation estimate to 2.7% from 2.5%, reflecting a tighter labor market, and projected a gradual decline to 2.4% in FY 2025 and 2.0% in FY 2026. The GDP growth forecast for 2024 was revised slightly lower to 0.5%, while the 2025 and 2026 projections remain at 1.1% and 1.0%, respectively.

S&P Global Manufacturing PMI

The S&P Global US Manufacturing PMI rose to 50.1 in January 2025 from 49.4 in December, exceeding the forecast of 49.7 and signaling slight improvement after six months of contraction. Factory output and new orders returned to modest growth, while employment increased for a third consecutive month, marking the fastest job creation since July. Supplier delivery times lengthened, though their impact on the PMI was less significant than in December. Inventories fell at the sharpest rate in 17 months, driven by higher input usage rather than cost-cutting measures.

S&P Global Services PMI

The S&P Global US Services PMI fell to 52.8 in January 2025 from 56.8 in December, below the expected 56.5. This indicates the slowest services expansion since April of the previous year. Output grew at a nine-month low, with export orders declining and new business rising at its slowest pace in three months. Despite this, job growth reached a 30-month high. Input costs rose, ending a 10-month slowdown, leading firms to increase selling prices.

Currencies

The DXY fell sharply as markets reassessed Trump’s pro-inflationary policies. At the World Economic Forum, he emphasized boosting energy production and easing regulations while avoiding mention of China tariffs, reducing inflation concerns for imports. Unemployment claims hit a three-year high in January, reflecting some labor market strain from tight monetary policy, though overall strength persists.

The Euro rose to $1.05, its highest in over a month, as the dollar weakened following Trump’s softened tariff stance and call for rate cuts. Flash PMIs for the Eurozone and Germany showed a recovery in private sector activity and a slowdown in manufacturing contraction. The ECB is expected to cut the deposit rate by 25bps next week, with further reductions likely.

The British Pound reached $1.24, supported by January data. Services and Manufacturing PMIs improved, but new business orders fell sharply, and employment declined for the fourth month due to rising costs. Input prices climbed, with further increases likely from April’s tax and wage hikes. The Bank of England is set to cut rates by 25bps in February but may proceed cautiously.

The Japanese yen strengthened after the BOJ raised its interest rate by 25bps to 0.5%, the highest in 16 years. Inflation is expected to reach 2% later this year, with further hikes possible. Core inflation hit 3% in December, a 16-month high. Manufacturing contracted for the seventh month in January, while the services sector posted four-month-high growth.

Commodities

Gold surpassed $2,770 per ounce this week, nearing its record high of $2,790, fueled by a weaker dollar and Trump’s call for lower interest rates during the World Economic Forum. Uncertainty over tariffs and immigration policies further increased safe-haven demand, while underperforming US Services PMI supported prices. The Bank of Japan raised rates, the Fed is expected to hold steady, and the ECB is likely to cut. Gold is set for a fourth weekly gain.

Silver rose above $30.70 per ounce, a six-week high, driven by Trump’s rate-cut call and a weaker dollar. Markets expect a Fed cut in July. Supply concerns, strong industrial demand, and China’s role as a key consumer continue to support silver, with potential tariff reductions further strengthening demand.

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