The US dollar index saw a rebound on Friday (January 17, 2025) after experiencing a decline for three consecutive days. Despite the lackluster economic data from the United States, the dollar index managed to rise, thanks to pressure on the euro and the British pound stemming from worsening economic conditions in the Eurozone and the UK.
This rebound in the dollar index resulted in a correction in gold prices following a three-day appreciation, during which it reached a five-week high. Upon further examination, gold prices had actually been on an upward trend since the first trading session of 2025.
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From the end of 2024 to the trading session on Friday, gold prices increased from $2,624.28 per troy ounce to $2,724.68 per troy ounce, marking a rise of $100.4 (1,004 pips).
A key factor driving the surge in gold prices throughout 2025 has been the shift in the Federal Reserve’s stance, where the central bank has recently adopted a dovish approach by lowering its benchmark interest rate.
After establishing the benchmark interest rate at 5.5% in July 2023, the highest level since early 2021, the Fed enacted a cut of 50 basis points towards the end of Q3 2024, specifically in September 2024.
Following this, the Fed further reduced the benchmark interest rate by another 50 basis points during the November-December 2024 period. As we entered 2025, lower-than-expected inflation data prompted market participants to anticipate at least two more rate cuts from the Fed this year.
When the Fed reduces the benchmark interest rate, the yields on dollar-denominated instruments, like deposits and bonds, tend to decrease, making them less attractive to investors. Consequently, the US dollar typically experiences a decline in demand.
In such circumstances, there is a significant likelihood of capital flowing into alternative investment instruments that offer better yields, such as gold. This is especially true given the historical inverse relationship between gold prices and the US dollar.
In recent days, the yields on US government bonds have seen a notable decline. According to CNBC data, over the past week, the yield on 10-year bonds dropped as much as 24 basis points, from 4.81% to 4.57% at its peak and lowest point.
Yield Movement of 10-Year Treasury Bonds Over the Last 5 Days
Source: CNBC
Meanwhile, during the past month, the yield on 10-year bonds saw a decline of up to 31 basis points, from 4.9% to 4.59% when considering its highest and lowest points.
Yield Movement of 10-Year Treasury Bonds Over the Last Month
Source: CNBC
Implications for Swap Costs
The decline in yields on US government bonds has not only impacted gold prices but has also influenced swap costs—expenses incurred by traders maintaining open positions in gold products overnight (according to the broker’s server time).
Currently, the swap for gold products at MIFX is positive (2.5) for long positions and negative (-6.5) for short positions. This situation differs from previous periods when the swap for long positions was negative while the swap for short positions was positive.
When traders take a long position in gold (XAUUSD), they are essentially betting that gold prices will rise relative to the US dollar. To acquire gold through the XAUUSD pair, traders effectively ‘borrow’ US dollars from the market to finance their purchases.
If the US dollar interest rate decreases, the cost of borrowing US dollars also drops, leading to a positive swap for gold products (thus reducing costs or even yielding a profit from overnight positions).
Conversely, when traders take a short position on gold (XAUUSD), it means they anticipate that gold prices will fall relative to the US dollar. To open a short position, traders ‘borrow’ gold to sell it at market price, expecting to repurchase it at a reduced price in the future while holding the resulting US dollars from the sale.
If US dollar interest rates diminish, the earnings from holding US dollars for traders also decline, potentially pushing the swap for short positions on gold products into negative territory.
Besides US dollar interest rates, other factors affecting swaps include imbalances between significant buy and sell positions, costs of storing and borrowing physical gold, and economic conditions driven by key events.
Traders who typically hold open positions in gold overnight are encouraged to adjust their strategies according to the prevailing swap rates. Detailed information regarding applicable swaps at MIFX is available on their website.
Today, Monday (January 20, 2025), a significant event may lead to substantial movements in the financial market—the inauguration of Donald Trump as the 47th President of the United States.
A new era of governance in the United States will officially commence, with Trump announcing that he has prepared 100 executive orders to be signed immediately upon taking office. A focal point for market participants is an executive order aimed at increasing import tariffs from Canada and Mexico by 25%.
GOLD
As previously mentioned, gold prices faced a correction last Friday, further continuing this morning to $2,689.28 per troy ounce. Following this, gold reversed direction and peaked at $2,706.69 per troy ounce by midday.
This movement suggests that the drop in gold prices was primarily due to profit-taking while awaiting Trump’s inauguration. Should Trump sign the executive order to raise import tariffs, concerns of a trade war with Canada could trigger market turbulence.
In such conditions, gold, recognized as a safe haven asset, may regain its appeal. This sentiment could significantly influence gold’s performance in the European trading session.
OIL
Oil prices (CLS10) dropped by $1.36 to $77.37 per barrel in trading last Friday after Israel reached a ceasefire agreement with Hamas in Gaza. However, oil still recorded a weekly gain due to US sanctions imposed on the Russian crude oil industry.
These two factors could lead to volatility in oil prices, though the positive sentiment stemming from US sanctions is likely to dominate trends.
EURUSD
The EURUSD pair experienced significant volatility before dropping by 316 points (31.6 pips) to 1.03003 during Friday’s trading session. Weak economic conditions in the Eurozone and expectations from the European Central Bank (ECB) to potentially cut interest rates later this month intensified pressure on the EURUSD.
The release of Germany’s Producer Price Index (PPI) at 14:00 WIB could further increase volatility for this currency pair. Forecasts from Trading Central predict a 1% year-on-year growth for the PPI in December, up from a mere 0.1% YoY in the previous month. Should the data be released higher than forecast, it could provide a positive sentiment for the EURUSD.
GBPUSD
GBPUSD plunged by 712 points (71.2 pips) to 1.21643 during Friday’s trades following weak retail sales data from the UK, indicating worsening economic conditions.
This data reinforced expectations that the Bank of England (BoE) will cut interest rates in early February. This negative sentiment will continue to influence GBPUSD movements in the European trading session.
USDJPY
USDJPY climbed sharply to 156.277 during last Friday’s trading sessions. This spike is likely attributed to buying activity following a decline of over 260 pips in the previous two trading days.
The yen remains relatively strong, particularly after Bank of Japan (BoJ) Governor Kazuo Ueda hinted at potential interest hikes if economic and inflation conditions improve. This sentiment could exert downward pressure on USDJPY during the European trading session.
Nasdaq
The Nasdaq surged by 376 index points to 21,589 in trading last Friday, propelled by gains in major technology stocks like Nvidia and Alphabet.
Yet, the Nasdaq may face downward pressure again during the European session as market participants closely monitor Trump’s inauguration and any executive orders signed. If import tariffs from Canada and Mexico are implemented, it could result in negative sentiment for the Nasdaq.
