- Labor's defeat in the local elections risks dragging the GBPUSD lower.
- Slowing inflation in Tokyo reduces the chances of the Bank of Japan tightening monetary policy.
The EURUSD managed to stay afloat, recovering from its 50-day moving average. This was helped by the fact that the chances of the Federal Reserve cutting interest rates in June once again exceeded 50%. No less important was that the single currency was helped by reports that the European Central Bank had reduced its holdings of US assets from $51.9 billion to $50.9 billion and increased its holdings of Japanese assets. As a result, the dollar's share of reserves fell from 83% to 78%, partly due to changes in its exchange rate.
Central banks' diversification and foreign exchange reserves have become one of the key factors behind gold's rapid rally in 2024-2025. If regulators exchange dollars not only for precious metals but also for other currencies amid uncertainty over Trump's policies, the dollar will have a difficult time. According to more than 70% of investors who participated in the MLIV Pulse survey, the US dollar will fall by the end of next month.However, the dollar is not ready to give up yet. It is benefiting from the dollar's prolonged pause in its rate cut cycle. At the same time, yields on dollar-denominated assets remain high, while competing currencies remain vulnerable. For the first time since October 2024, core inflation in Tokyo fell to 1.8%, below Japan's target. This statistic is considered a leading indicator of domestic inflation and could deprive USDJPY bears of an important trump card as it undermines the case for further rate hikes to normalize policy.
Britain's Labor Party faces a tough test due to elections in Gorton, Denton and Greater Manchester. Polls show populist Reform UK and the Greens will squeeze the ruling party and bring Keir Starmer closer to resigning as prime minister. Rising political risks and expectations of a Bank of England rate cut as early as March are putting pressure on.
Interestingly, gold is not quick to take advantage of the weakness of the world's major currencies. The precious metal closely follows the progress of negotiations between Washington and Tehran, which were postponed until next week. At the same time, American officials seemed dissatisfied, while Iranian officials spoke of significant progress. A diplomatic failure would lead to an armed conflict in the Middle East and increase the demand for safe assets, mainly gold.
He FxPro Analyst team
