Gold plummets as stubborn US Inflation dents Fed rate cut expectations for June

Gold price tumbles as the US inflation turns out sticky.
Market expectations for the Fed reducing interest rates in June could be impacted.
US annual headline inflation accelerated to 3.2%, and core CPI grew by 3.8%.

Gold price (XAU/USD) faces intense selling pressure as the United States Bureau of Labor Statistics (BLS) has reported stubborn Consumer Price Index (CPI) data for February in Tuesday's early New York session. Strong CPI data lead to declining market expectations for Federal Reserve (Fed) rate cuts in the June policy meeting. Stubborn price pressures have increased of opportunity cost of holding investments in non-yielding assets, such as Gold.

The hotter-than-expected inflation report leads to an increase in yields on interest-bearing bonds. 10-year US Treasury yields rebounded strongly to 4.15%. The US Dollar Index (DXY), which closely tracks the Greenback’s value against six major currencies, climbs to 103.20.

The USD index broke Monday’s trading range on the upside as sticky inflation data is expected to allow Fed policymakers to avoid rushing for interest rate cuts. In the broader term, a sticky inflation report will also improve the appeal of the US Dollar, as it would allow the Fed to keep interest rates higher for a longer period.

Daily digest market movers: Gold price weakens after sticky US Inflation data

Gold price tumbles as the United States consumer price inflation data remains stubborn than expectations
Monthly headline CPI rose by 0.4%, as expected, against a 0.3% increase in January. The monthly core CPI, which excludes volatile food and energy prices, grew at a steady pace of 0.4% while investors anticipated it to rise by 0.2%. Annual headline inflation was up by 3.2% against expectations and the prior reading of 3.1%. The core CPI accelerated at 3.8% from expectations of 3.7% but lower than the former reading of 3.9%.
Hotter-than-expected inflation data would allow Federal Reserve policymakers to avoid rushing for rate cuts. Fed policymakers may reiterate that a victory over inflation is not in sight. Also, the uncertainty over the interest rate cuts in the first half of this year will deepen as policymakers could lean towards keeping interest rates higher.
Last week, Fed Chair Jerome Powell said in his Congressional testimony that it would be inappropriate to start lowering interest rates before gaining conviction that inflation will sustainably return to the 2% target. However, Powell also said that the central bank is not far from gaining that conviction.
Before the release of the US CPI data, market expectations for the Fed reducing interest rates in the June meeting were firm as labor market conditions are not overly tight. The US Nonfarm Payrolls (NFP) report for February showed slower wage growth and a higher Unemployment Rate, though hiring remains robust. The CME FedWatch tool shows that there is a 72% chance that the Fed will cut interest rates in June.

Technical Analysis: Gold price falls to $2,160

Gold price breaks below the three-day tight range, between $2,170 and all-time highs of $2,195, after sticky US inflation data. The nine-day winning streak of the Gold price halts amid uncertainty over Fed rate cut expectations. The divergence between the 20-day Exponential Moving Average (EMA) at $2,097 and the Gold price is waning. The asset tends to face a mean-reversion move after a wide divergence, which results in a price or a time correction.

On the downside, December 4 high near $2,145 and December 28 high at $2,088 will act as major support levels.

The 14-period Relative Strength Index (RSI) reaches the overbought territory at 84.50, pointing to some correction ahead.

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.

Share: Feed news

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.