Gold surrenders recovery as caution appears ahead of US Inflation data

Gold price finds an interim support ahead of the US inflation data.
The US headline and core inflation grew by 0.2% and 0.3% respectively in December.
The likelihood of a rate cut by the Fed from March has eased due to solid labor market conditions.

Gold price (XAU/USD) recovery stalls on Wednesday as investors shift focus to the United States inflation data for December, which will be released on Thursday. The recovery in the Gold price is expected to remain short-lived as investors’ confidence that the Federal Reserve (Fed) will start cutting interest rates from March has been shaken. This is due to upbeat labor market conditions and the fact that core Consumer Price Index (CPI) is double the desired rate of 2%.

Fed policymakers have been supporting a tighter monetary policy stance and endorsing interest rate cuts in the second-half this year, until they are more confident that inflation will return to 2%. Furth action in bullions and safe-haven assets will be guided by the US inflation data. A softer-than-anticipated inflation report will boost hopes in favour of rate cuts from March – supporting the Gold price – while escalated numbers could build more stress.

Daily Digest Market Movers: Gold price turns subdued ahead of US CPI

Gold price aims for a firm-footing around $2,030 after two-weeks of decline as US Treasury Yields have dropped ahead of the United States inflation data for December.
The 10-year US Treasury yields have slipped to near 4.04% as inflation data is eyed.
The upside in the precious metal is expected to remain restricted as investors are expected to wait before taking informed decisions post release of the inflation data.
The precious metal remained under pressure lately as investors cut bets in favour of rate cuts by the Federal Reserve from March due to healthy labor market conditions and the core inflation remaining double the required rate of 2%.
As per the CME Fedwatch tool, the chances of Fed reducing interest rates by 25 basis points (bps) to 5.00-5.25% have dropped to 63% from 90% a week earlier.
Apart from that, Fed policymakers are leaning towards a restrictive interest rate stance until price stability gets ensured.
This week, Atlanta Fed Bank President Raphael Bostic said he is naturally biased towards a tight monetary policy stance until he is sure that the underlying inflation will return to 2% before supporting rate cuts.
Raphel Bostic sees the first interest rate cut coming in the third quarter and two quarter-percent rate cuts due in the final quarter this year.
Meanwhile, the US Dollar Index (DXY) trades topsy-turvy around 102.50 ahead of the US inflation data.
As per the consensus, the monthly headline inflation is expected to have grown at a higher pace of 0.2% against 0.1% increase in November. In the same period, the core CPI that strips off volatile food and Oil prices is seen rising steadily by 0.3%.
Annually, the headline inflation is forecast to have accelerated to 3.2% against 3.1% growth in November while the core inflation softened to 3.8% vs. the former reading of 4.0%.
A sticky inflation report may result in a further decline in the chances Fed policymakers will roll back their restrictive monetary policy stance while moderate numbers could boost hopes of rate cuts from March.
Before the US inflation data, investors will focus on the speech from New York Federal Reserve President John Williams. The Gold price could face more pressure if Williams joins Raphael Bostic in support of waiting till the end of the year before making rate cuts.

Technical Analysis: Gold price aims stability above $2,030

Gold price has found an interim support after correcting more than 3% from 28 December 2023 high around $2,090 as uncertainty over rate cuts by the Fed continues to persist. The near-term demand for the Gold price is not bullish anymore as the 20-day Exponential Moving Average (EMA) around $2,038 is acting as a strong barrier. While the broader trend is still bullish as the 50-and 200-day EMAs are sloping higher. More downside could appear if the yellow metal drops below three-week low around $2,016.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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