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Gold price eyes recovery on softer-than-projected US core PCE inflation data

  • Gold price trades sideways as investors do aftermath post release of the soft core PCE inflation data.
  • Easing risks to price pressures would escalate bets for ear rtae-cuts by the Fed.
  • The US economy is performing stellar on the grounds of consumer spending, labor market and economic growth.

Gold price (XAU/USD) is expected to come out of the woods as the US Core Personal Consumption Expenditure – Price Index (PCE) report for December shows a slower pace growth in price pressures than what anticipated by market participants. The annual underlying inflation data slowed to 2.9% from expectations of 3% and the former reading of 3.2%. Monthly core PCE price index data grew by 0.2% as anticipated by the market participants. In Novemebr, the economic data rose slightly by 0.1%. Easing price pressures would escalate bets advocating for a rate-cut decision by the Federal Reserve (Fed) in the March monetary policy meeting.

It is going to a balancing act for Fed policymakers as economic indicators such as consumer spending, labor market and the Gross Domestic Product (GDP) have remained robust, which would allow them to advocate for higher interest rates at least for the first six months of 2024. 

Daily Digest Market Movers: Gold price aims recovery as Fed's preferred inflation gauge eases

  • Gold price is expected to come out of the woods as the US Core Personal Consumption Expenditure – Price Index (PCE) for December remained softer than expectaions.
  • The CME Fedwatch tool is showing that the chances in favour of a 25-basis point (bp) rate cut in March ahave rebounded to 50% after a slowdown in underlying price pressures.
  • While struggle for Fed policymakers remain unabated as the US economy is resilient on multiple grounds.
  • The US economy expanded at a robust pace of 3.3% in the final quarter of 2023 while market participants projected a slower growth rate of 2.0%. This has uplifted the economic outlook, which could keep price pressures elevated.
  • US Treasury Secretary Janet Yellen said surprisingly strong economic growth came from higher productivity and robust consumer spending without escalating inflation risks.
  • Going forward, market participants will shift their focus towards the Fed’s first monetary policy of 2024, which will be announced next week.
  • The Fed is widely anticipated to keep interest rates unchanged in the range of 5.25-5.50% for the fourth time in a row. Investors will keenly focus on the timing of when the Fed will start reducing interest rates.
  • Till now, Fed policymakers have been considering expectations of rate-cuts from March as “premature” due to resilient US economic prospects and stubborn inflationary pressures.
  • Fed policymakers have been warning that rate cuts at this stage would be premature, which could lead to a surge in overall demand and dampen efforts made to bring down core inflation to its current 3.9% level.

Technical Analysis: Gold trades stabilizes above $2,020

Gold price continues to trade sideways in a limited range as the broader focus is on the Fed’s interest rate policy, which will be announced next week. The precious metal struggles to sustain above the 50-day Exponential Moving Average (EMA), which trades around $2,015.00. Fresh downside would appear if the asset drops below the psychological support of $2,000. Momentum oscillators indicate a sharp decline in volatility.

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Author

Sagar Dua

Sagar Dua

FXStreet

Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.

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