- Gold price remains under pressure as sticky US CPI data suggests interest rates will stay high.
- Surging rental and healthcare costs drive price pressures in the US economy.
- The US Dollar extends its upside amid a risk-off market sentiment, further weighing on Gold.
Gold price (XAU/USD) continues its five-day losing streak on Wednesday as hot United States inflation data suggests the Federal Reserve (Fed) will hold back from cutting interest rates at its monetary policy meeting in May. The opportunity cost of holding non-yielding assets, such as Gold, has risen as the Fed is expected to keep interest rates at their current level for a longer period.
The absence of evidence ensuring the return of the underlying inflation to the 2% target has strengthened the need to maintain a hawkish narrative on interest rates. Fed policymakers are not expected to bring down critical rates until they see price pressures easing for a decent period.
The US Consumer Price Index (CPI) grew faster than market expectations due to an uptick in rental and healthcare costs.
Contrary to market action, US Treasury Secretary Janet Yellen said on Tuesday there is progress in the war against persistent inflation despite surging rental prices.
Daily Digest Market Movers: Gold price exposes to more downside
- Gold price declines toward a two-month low of around $1,975 as stubborn United States inflation data for January has cooled down expectations of rate cuts by the Federal Reserve in the May monetary policy meeting.
- The CME Fedwatch tool now shows that traders see a 38% decline in interest rates by 25 basis points (bps) for the May meeting, which was almost 50% before the release of the US inflation data.
- On Tuesday, the US Bureau of Labor Statistics (BLS) showed that core inflation rose steadily by 3.9%, while the headline inflation grew at a moderate pace of 3.1% against expectations of 2.9%.
- The Fed generally considers core inflation data for preparing monetary policy remarks, and sticky underlying price pressures are sufficient for Fed policymakers to maintain their hawkish rhetoric.
- Now, expectations for a rate cut have shifted to the June monetary policy meeting as stubborn price pressures would allow Fed policymakers to emphasize holding interest rates in the range of 5.25%-5.50% for a longer period.
- The interest rate decision is widely anticipated to remain unchanged for the March monetary policy meeting.
- Meanwhile, the US Dollar Index (DXY) struggles to extend upside despite refreshing a three-week high at 104.90. The US Dollar attracts higher foreign inflows if the Fed maintains a restrictive stance.
- 10-year US Treasury yields have corrected mildly to 4.29% in the London session on Wednesday but are still almost 3% high this week.
- Going forward, market participants will focus on the monthly US Retail Sales data for January, which will be published on Thursday.
- Investors anticipate that Retail Sales dropped by 0.1% against a 0.6% increase in December. This might weigh on the US Dollar as weak sales at retail stores indicate a decline in household spending.
Technical Analysis: Gold price oscillates below $2,000
Gold price prints a fresh two-month low below $1,990. The precious metal witnesses an intense sell-off after surrendering the psychological support of $2,000. The Yellow Metal is expected to face more downside as a breakdown of the Symmetrical Triangle chart pattern seems confirmed due to wider bearish tick formation on Tuesday.
The short-term appeal has turned bearish as the 20 and 50-day Exponential Moving Averages (EMAs) have turned down. The Gold price is expected to find support near the 200-day EMA, which trades around $1,970.
The 14-period Relative Strength Index (RSI) has slipped below 40.00 for the first time in more than four months. More downside looks likely amid an absence of oversold and divergence signals.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Source: https://www.fxstreet.com/news/gold-price-continues-losing-streak-as-hot-inflation-pushes-back-fed-rate-cut-expectations-202402141018