Sterling fell in European trade on Monday against euro away from three-month highs and on track for the first loss in five sessions on profit-taking.

Despite the decline, sterling is expected to rebound as the gap between UK and Euro zone treasury yields tilts in the pound's direction.

EUR/GBP

EUR/GBP rose 0.3% to 0.8585, with a session-low at 0.8553, after rising 0.8% on Friday, the fourth profit in a row, and the largest since February 2023, marking three-month highs at 0.8552. 

Sterling rallied 1.4% against euro last week, marking the best weekly profit in 2023 as investments move readily in favor of the pound due to future prospects of interest rates.

In the UK, investors are reducing bets on early interest rate cuts by the Central Bank, with the opposite course in the euro zone. 

Thus the government yield gap between the UK and euro zone rallied considerably in favor of the pound. 

Recent Euro zone inflation data bolstered the case for an early interest rate cut by the European Central Bank in 2024, potentially in May.

Conversely, markets don't expect Bank of England to enact the first interest rate cut until later in the summer. 

Several BOE officials recently asserted that interest rates will remain at the tight 5.25% level for an extended duration until inflation is reliably brought under control. 

Gold prices rose in European trade on Monday, extending gains for a second session and passing $2100 an ounce, hitting a record high on strong prospects of early interest rate cuts by the Federal Reserve following recent remarks by Fed official Jerome Powell.

In addition to strong demand on the precious metal as a safe haven due to mounting geopolitical concerns as the Israeli-Hamas war resumes ferociously once more. 

Gold Prices Today

Gold prices rose 3.6% to $2,146 an ounce, a record high, with a session-low at $2,057, after rising 1.8% on Friday, the fifth profit in a row as the dollar and US treasury yields lost ground following weak data.

Gold prices jumped 3.45% last week, the third weekly profit in a row and the largest since October on strong haven demand. 

Powell

Fed Chair Jerome Powell said on Friday that it's clear the monetary policy is slowing the economy down as expected, with interest rates reaching appropriate tightening levels, however he still opened the way for further policy tightening if needed

US Rates

Odds for a US interest rate hike at the December Fed meeting fell to just 2.5%

Odds for an interest rate cut by the Fed in March surged to 64%, while odds for a cut in May surged to 90%. 

Geopolitical Tensions 

A major factor boosting gold prices now are the ongoing geopolitical tensions in the Middle East as Israel resumes military attacks on Gaza.

Yemen's Islamic Houthi group also mounted attacks on ships in the Red Sea, claiming them to be Israel ships, with US forces in the region intercepting drones. 

The SPDR

Gold holdings at the SPDR Gold Trust rose 2.31 tonnes on Friday to a total of 878.82 tonnes, away from November 13 lows at 876.51 tonnes. 

Euro fell in European trade on Monday against a basket of major rivals, extending losses for the fourth straight session against the dollar and almost touching two-week lows amid prospects of an early interest rate cut in Europe. 

To re-evaluate such prospects, investors now await remarks from European Central Bank President Christine Lagarde about the future of monetary policy and interest rate in the euro zone.

EUR/USD

EUR/USD fell 0.2% to 1.0853, with a session-high at 1.0895, after losing 0.1% on Friday, the third loss in a row, hitting a two-week trough at 1.0829 under pressure from European consumer prices. 

EUR/USD lost 0.5% last week, the first weekly loss in three weeks on profit-taking away from a three-month high at 1.1017. 

European Inflation

European consumer prices rose 2.4% y/y in November, nearing the 2% target and reducing pressures on ECB policymakers. 

The data bolstered the cause for ending the current cycle of ECB policy tightening and prepare for an early interest rate cut in 2024. 

Goldman Sachs said it expects the ECB to cut interest rates in the second quarter of 2024. 

Lagarde 

ECB President Christine Lagarde will speak later today in Paris on policies and interest rates, and will likely comment on recent solid inflation data. 

The Canadian dollar rose against most major rivals on Friday following positive labor data.

The Canadian  government reported an addition of 24.9 thousand jobs to the economy in November, beating estimates of 14.2 thousand.

The data also showed unemployment rose to 5.8% as expected last month from 5.7% in October.

CAD/USD rose 0.5% as of 21:24 GMT to 0.7410. 

Yen

Dollar fell against yen as of 21:24 GMT by 0.9% to 146.8. 

Government data showed Japan's unemployment rate fell to 2.5% in October from 2.6%. 

US Dollar

The dollar index fell 0.3% as of 21:03 GMT to 103.2, with a session-high at 103.7, and a low at 103.1.

Government data showed the ISM manufacturing PMI in the US stable at 46.7, missing estimates of 47.9. 

Fed Chair Jerome Powell said on Friday that talks about interest rate cuts are premature as the battle of inflation remains unfinished.

He asserted the Fed intends to maintain tight monetary conditions until inflation firmly heads towards 2%. 

He said that inflation remains much higher than targets but is moving the right direction, so the right path to take now is a cautious one, while continuously monitoring data to determine upcoming steps.