Fed Rate Cut Speculation Lifts Gold While Dollar Faces Headwinds

Market expectations for imminent Fed policy easing have created a tailwind for precious metals and headwinds for the dollar. December’s FOMC meeting has become the focal point for rate cut speculation, with derivatives markets now pricing in an 83% probability of a 25 basis point reduction—a dramatic shift from just 30% probability the previous week.

Dollar Retreats as Rate Cut Odds Climb

The Dollar Index retreated to its lowest level in 1.5 weeks on Friday, closing 0.08% lower as investors repositioned ahead of anticipated monetary accommodation. The shift in Fed rate cut expectations represents the primary driver of dollar weakness, as lower interest rates typically reduce the appeal of dollar-denominated assets.

Additional pressure emerged from political developments. Reports indicated that Kevin Hassett has emerged as the leading candidate to chair the Federal Reserve following Jerome Powell’s tenure. Market participants view Hassett as a dovish policymaker aligned with lower interest rate policies, raising concerns about potential politicization of monetary policy and erosion of central bank independence.

Equity market strength on Friday also dampened safe-haven demand for the dollar, as investors rotated into risk assets amid optimistic sentiment.

Euro Finds Support Despite Mixed Data

EUR/USD advanced 0.05% on Friday, recovering from early weakness as dollar depreciation provided a supportive backdrop. The euro drew additional strength from inflation data that defied expectations. The Eurozone’s one-year inflation expectations unexpectedly climbed to 2.8% from 2.7%, exceeding forecasts of moderation to 2.6%—a development potentially hawkish for European Central Bank policy deliberations.

German inflation metrics reinforced this dynamic. November CPI rose 2.6% year-over-year, marking the largest gain in nine months and exceeding the 2.4% consensus. This upside surprise contrasts with a softening in retail activity, where October sales declined 0.3% month-over-month against expectations of 0.2% growth.

The ECB market pricing currently discounts minimal probability of policy adjustments at the December 18 meeting, with rate cut odds at just 2%.

Yen Gains Traction on Strong Economic Data

USD/JPY declined 0.12% as the Japanese yen strengthened on better-than-anticipated economic releases. October industrial production rose 1.4% month-over-month, reversing expectations for a 0.6% contraction. Retail sales momentum proved equally impressive, climbing 1.6% month-over-month—the strongest reading in five years and double the 0.8% forecast.

Tokyo’s November CPI increased 2.7% year-over-year, meeting expectations and remaining above the 2% threshold that supports a hawkish interpretation for Bank of Japan policy considerations. Core inflation excluding fresh food and energy similarly matched expectations at 2.8%.

Labor market indicators provided a counterweight to this yen support. Japan’s jobless rate remained flat at 2.6% despite forecasts of improvement to 2.5%, while the job-to-applicant ratio softened to 1.18 from expectations of stability at 1.20. These employment signals suggest underlying weakness in labor demand that may moderate yen appreciation momentum.

Derivatives markets now assign a 59% probability to a BOJ rate hike at the December 19 policy meeting.

Precious Metals Surge on Easing Expectations

Gold and silver staged a powerful rally Friday, with December COMEX gold futures advancing $53.10 (+1.27%) and silver rising $0.639 (+1.27%). The move brought silver to an all-time high of $56.46 per troy ounce, while gold posted its best performance in two weeks.

The rally reflects multiple supportive factors. Most prominently, intensifying expectations for Fed rate reductions at the December 9-10 FOMC meeting have boosted precious metals’ appeal as value stores during periods of monetary accommodation. The shift from 30% to 83% rate cut pricing within a single week signals rapid repricing of monetary policy expectations.

Geopolitical and policy concerns have also bolstered safe-haven demand. Uncertainty surrounding potential US tariff implementations, regional tensions, and Fed leadership transitions have prompted allocations toward precious metals. The Hassett nomination possibility particularly resonates with markets, as dovish policy inclinations would likely weigh on the dollar and support commodity prices.

Central bank demand remains a substantial structural support for gold. China’s People’s Bank of China expanded bullion reserves to 74.09 million troy ounces in October, extending its streak to twelve consecutive months of accumulation. Globally, central banks acquired 220 metric tons of gold during Q3, representing 28% growth compared to Q2 purchasing levels.

Supply constraints amplify support for silver specifically. Shanghai Futures Exchange warehouse inventories have declined to decade-low levels, tightening available supply and providing fundamental underpinning for prices.

Technical disruptions temporarily dampened trading activity Friday when the Chicago Mercantile Exchange experienced outages affecting precious metals futures and options execution.

Headwinds Emerge for Further Advances

Despite the compelling rally drivers, several factors may limit upside extension. Equity market appreciation on Friday actually pressured precious metals by reducing safe-haven demand. Signs of potential Ukraine conflict resolution have similarly reduced geopolitical premium demanded by precious metals investors. Additionally, since recording mid-October peaks, liquidation pressures from long-positioned traders have created intermittent selling pressure. Recent ETF holdings data reflects this dynamic, showing declines from the October 21 three-year highs achieved just weeks earlier.

The coming weeks will likely prove pivotal as markets await official FOMC communication regarding monetary policy direction and Fed leadership appointments that could influence precious metals trajectories.