Gold set to rally as soft PCE data boosts rate cut hopes

• Gold price is set to continue rallying as the Fed is expected to cut rates sooner than anticipated.
• The core PCE price index declined more than expected to 3.2% in November.
• Action could be limited due to a thin-trading week.

Gold price (XAU/USD) looks set to rally further after a significant decline in the United States core Personal Consumption Expenditure price index (PCE) in November has boosted hopes of early rate cuts by the Federal Reserve (Fed). Market participants are pricing in the first rate cut by the Fed in March, and second in May after two years of historically rapid rate-tightening by the central bank. 

Fed policymakers, who were endorsing higher for longer interest rates to ensure a return of inflation to 2%, may support an early reduction in borrowing costs. The current cycle in which interest rates have undergone tightening for a longer period may impact the overall state of employment in the economy. Hopes of interest rate cuts have propelled home prices higher, which remained muted from February 2022 till June.

Daily Digest Market Movers: Gold price hovers near three-week high

• Gold price trades near a three-week high around $2,065 as a sharper-than-projected decline in the United States core PCE price index data has fuelled bets in favour of early rate cuts by the Fed.
• The US core PCE price index data softened to 3.2% vs. the estimates of 3.3% and the former reading of 3.5%. On a monthly basis, the underlying inflation data grew slightly by 0.1% while market participants projected a steady growth of 0.2%. 
• It is worth noting that the Fed forecasted core PCE price index at 3.2% by the year-end in its Summary of Projections (SOP) released last week. This indicates that the Fed has achieved its inflation target of 2023.
• This greater-than-projected decline in the Fed’s preferred inflation tool may force policymakers to endorse rate cuts sooner than previously thought.
• As per the CME Fedwatch tool, market participants are pricing in a more than 71% odds chance of an interest rate cut in March. The likelihood of a second rate cut in May is more than 68%.
• Till now, Fed policymakers have been pushing back rate cut expectations, citing the need for a restrictive interest rate policy for a longer period to ensure the achievement of price stability.
• A significant decline in the US inflation data is setting a better start for the Fed for 2024, which would allow them to achieve a soft landing for the economy. Such a soft landing would enable price stability without triggering a recession.
• Apart from the US core PCE price index data, investors also focused on the Durable Goods Orders for November, released on Friday.
• New orders for durable goods rose at a stronger pace of 5.4% against expectations of 2.2%. In October, orders of durable goods contracted by 5.1%.
• Subsiding inflation in the US economy has boosted consumer confidence. The Michigan Consumer Sentiment index for December, released last week, rose to 69.7, against projections and the former reading of 69.4.
• The confidence of US residents in the economic outlook was also boosted by expectations of higher disposable income among households due to easing price pressures. 
• Meanwhile, annual home prices continued to accelerate in October amid deepening expectations of earlier rate cuts by the Fed. 
• The Federal Housing Finance Agency (FHFA) report showed that prices of residential properties grew 6.3% in October on a yearly basis, up from a former reading of 6.2%. 
• Deepening rate cut expectations by the Fed have weighed heavily on the US Dollar and Treasury yields.
• Lower interest rates, or their expectation, tend to reduce foreign capital inflows negatively impacting a currency.
• The US Dollar Index hovers near a five-month low below 101.50 and 10-year US Treasury yields have dropped further to near 3.87%.
• This week, the economic calendar will be light due to it being a holiday week while the second-tier weekly jobless claims data will be in focus. 

Technical Analysis: Gold price eyes more upside above $2,070

Gold price hovers near a two-day high at around $2,066 in a thin-trading week. The precious metal is expected to remain sideways amid an absence of critical events ahead. More upside would appear if the Gold price manages to sustain above the crucial resistance at $2,070. Short-to-long term daily Exponential Moving Averages (EMAs) are sloping higher, pointing towards an upside bias. Momentum oscillators swing in a bullish trajectory, indicating a healthy trend to the upside.