Euro extends gains to four-month high amid positive outlook
Euro rose in European trade on Wednesday against a basket of major rivals, extending gains for the fourth straight session against the dollar and hitting a four-month high amid hopes the current policy gap between Europe and the US will increase.
The gains come amid positive outlook for the euro towards $1.1, with strong sentiment dominating the markets as the Federal Reserve prepares for an interest rate cut.
EUR/USD rose 0.1% to 1.1050, the highest since August 10, with a session-low at 1.1028, after rising 0.25% on Tuesday, the third profit in a row amid calm trading due to New Year holidays.
Interest Rate Gap
The current European-US interest rate gap stands at 100 basis points, the smallest such gap since May 2022, and is expected to shrink starting next March when the Fed is poised to start cutting rates.
The European Central Bank has taken a more bullish stance, in turn hurting chances of early European interest rate cuts in the first half of 2024.
Positive Outlook
The major nordic bank Danske Bank expects the EUR/USD pair to hit $1.11 before tapering off for some months.
Such expectations are in line with improving risk sentiment and appetite in the markets, which usually favors the EUR/USD pair.
That's doubly so as the ECB appears to take a more bullish stance on interest rates and policies compared to the Federal Reserve in 2024.
How much will global trade be impacted by threats to Red Sea transport?
Recent attacks by the Houthi group on maritime shipments going through the Red Sea represent a grave threat to global trade, as this corridor is one of the busiest trade routes worldwide.
A reroute around Africa would be lengthier, more expensive, and could potentially require more ships, which in turn would raise costs.
Iran-backed Houthis said their attacks are in support of the Gaza strip against Israel, and while they lack the capability to completely close the Red Sea route, they have the ability to sow fear there, forcing multiple international shipping companies to reroute around Africa.
Houthis
Houthis are a Shia group with military and political arms. They joined the attacks against the Yemeni government during the Arab Spring and subsequently controlled most of the country.
Houthis have regularly launched attacks against Red sea Shipments since 2014 as a way to pressure global powers and attract attention.
US Intervention
Washington and allies recently launched an international coalition to protect the global trade movement through the Red Sea from Houthi attacks, and it remains to be seen how effective such a step will be.
Wall Street opens last week of 2023 with gains
US stock indices gained ground on Tuesday, resuming strong gains as the year wraps up.
Trading remains thin amid New Year holidays, however markets are optimistic about the new year.
Inflation continues to stream down worldwide, especially in the US with is experiencing a soft landing, with growth chugging along even as inflation tapers off.
Markets also expect the Fed to start cutting interest rates at the March meeting.
On trading, Dow Jones rose 0.3%, or 123 points as of 17:15 GMT, while S&P 500 rose 0.3%, or 16 points to 4,770, as NASDAQ added 0.5%, or 67 points to 15,060.
Gold hovers near two-week high as dollar weakens
Gold prices rose in European trade on Tuesday, extending gains for the third straight session and almost touching two-week highs as dollar weakens against major rivals.
Weak US data and bearish remarks by Fed officials paved the way for an early US interest rate cut in March.
Gold Prices Today
Gold prices rose 0.6% to $2,065 an ounce, with a session-low at $2,052, after rising 0.35% on Friday, the second profit in a row, hitting a two-week high at $2,070 following weak US consumer spending data.
Gold rallied 1.6% last week, the second weekly profit in a row as both the dollar and US treasury yields declined.
The Dollar
The dollar index lost over 0.1% on Tuesday, extending losses for the third session in a row and almost touching five-month trough at 101.43 against a basket of major rivals.
A weaker dollar makes dollar-denominated gold futures cheaper for holders of other currencies.
A spate of recent US data, including consumer spending data for November, showed that inflation is clearly slowing down in response to policy tightening.
US Rates
Following the data, pricing for a US interest rate cut at the March Fed meeting rose to 88%, while pricing for such a cut at the May meeting fell to 99.5%.
The SPDR
Gold holdings at the SPDR Gold Trust remained flat on Friday at 878.25 tonnes.