Sterling rose in European trade on Monday against a basket of major rivals, extending gains for the second straight session against the dollar and scaling a two-month high amid strong risk appetite.

The gains come ahead of Bank of England's Governor Andrew Bailey's speech later today, which could shed light on the future of interest rates and inflation.

GBP/USD

GBP/USD rose 0.4% to 1.2510, the highest since September 13, with a session-low at 1.2446, after closing up 0.4% on Friday, the first profit in three days as the dollar tumbled against most rivals. 

The pound rose 1.9% last week against the dollar, the second weekly profit in three weeks following a spate of weak US data.

Bailey

Later today, Bank of England Governor Andrew Bailey will speak on London on the future of monetary policy and interest rates. 

Bailey recently said that it's too early to talk about interest rate cuts, and that monetary policies should remain right for an extended duration.

He said the BOE expects inflation to take two years before reaching the 2% target. 

The Dollar

The dollar index fell 0.3% on Monday, sharpening losses for another session and plumbing a 2-/15 month trough at 103.47 against a basket of major rivals.

The dollar continues to suffer from a spate of weak US data released last week, especially consumer and producer prices data, which effectively ruled out another interest rate hike next month. 

Investors now pretty much expect the Federal Reserve to wrap up the current cycle of policy tightening and focus on the data of the first interest rate cut in 2024. 

Euro rose in European trade on Monday against a basket of major rivals, extending gains for the third straight session against the dollar, scaling a three-month high and approaching the $1.1 barrier.

Such gains come as concerns about the the widening interest rate gap between the US and Europe diminish, with analysts now expecting both the Federal Reserve and the European Central Bank to maintain interest rates unchanged next month.

EUR/USD

EUR/USD rose 0.3% to $1.0940, the highest since August 30, after rising 0.5% on Friday, the second profit in a row as the dollar suffers widespread losses against rivals. 

Euro rallied 2.1% last week against the dollar, the second weekly profit in three weeks, and the largest since July.

A spate of weak US inflation and labor data hurt chances of another US interest rate hike next month. 

Interest Rate Gap

The current interest rate gap between Europe and the US stands at just 100 basis points, the lowest gap since May 2022, and will likely remain so until the first quarter of next year.

Most analysts expect no change in US and European monetary policies when both the Fed and the ECB hold periodic meetings in December. 

The $1.1 Barrier 

Euro is a few cents away from touching the $1.1 barrier as the new week opens up with strong risk appetite, following a spate of weak US consumer and producer prices data that pummeled the odds of another US interest rate hike in December to just 1%. 

The Fed is all but certain now to end the current cycle of policy tightening and prepare for the next step, which interest rate cuts next year.

European Economy 

Economists are warning that the European economy is heading to a mild recession, likely in the fourth quarter of 2023, and potentially in early 2024 as well. 

Gold prices fell in European trade on Monday away from two-week highs on profit-taking, while US 10-year treasury yields rebound.

Now investors await strong data on the future of US interest rates, and the Federal Reserve's last meeting minutes.

Gold Prices Today

Gold prices fell 0.4% to $1,973 an ounce, after closing flat on Friday away from a two-week high at $1,993. 

Gold prices rallied 2.2% last week, the first profit in three weeks following a stream of weak US data.

Such data hurt the odds of another US interest rate hike in December.

Investors now mostly expect the Fed to end the current cycle of policy tightening as markets focus on the likely timeline of the next interest rate cuts.

US Yields

US 10-year treasury yields rose 0.75% on Monday away from two-month lows at 4.381%, pressuring non-yielding assets.

Investors also await important data on the future of US interest rates, especially the Fed's minutes, scheduled for release tomorrow. 

The minutes will shed light on the inner thoughts of the Federal Reserve officials and the likely path ahead for monetary policies. 

The SPDR 

Gold holdings at the SPDR Gold Trust rose 12.98 tonnes on Friday, the largest such increase since March 2022.

Total holdings are now up to 883.43 tonnes, the highest since September 11. 

Palladium prices rose on Friday as the dollar declined against a basket of major rivals on track for the best weekly performance in a year.

Investors are betting the Federal Reserve has reached the end of the policy tightening cycle, in turn pressuring dollar and US treasury yields. 

Now traders expect the Fed to cut interest rates by next May as inflation continues to slow down. 

Recent data indicated US consumer prices stabilized in October m/m, while core prices rose just 0.2%, while producer prices slowed down to 3-1/5 year nadir. 

A potential cut in interest rates will underpin non-yielding assets such as gold and industrial metals. 

Dollar on the other hand is heading for a weekly loss, making palladium and other metals cheaper to holders of other currencies. 

The dollar index fell 0.3% as of 15:45 GMT to 104.01, with a session-high at 104.5, and a low at 103.9.

Gold spot futures rose 1.2% to $1,062.5 an ounce as of 15:46 GMT. 

Palladium is heavily used in the automotive industry, to reduce exhaust fumes.