Gold price has extended its recovery to near $2,030 as the US Dollar drops gradually.
A pullback move in the Gold price is less convincing as traders have pared bets for a Fed rate cut in March.
Upbeat US Retail Sales numbers signal upside risks to US inflation.
Gold price (XAU/USD) rises further on Friday’s European session as the appeal for safe-haven assets improves due to the deepening Middle East conflict. Adding to the war in Gaza, tensions between Houthi rebels and the United States military are increasing in the key commercial shipping route crossing the Red Sea. Moreover, Pakistan carried out military strikes in Iran on Thursday following a similar attack by Iran in its territory.
In this context, the precious metal has recovered significantly, but the outlook in the near term has not turned bullish as further upside looks capped by diminishing bets supporting an interest-rate cut from the Federal Reserve (Fed.)
The outlook for inflation in the United States remains uncertain. Price growth is gradually declining, but recent data suggests that the economy is strong, particularly due to robust household spending. This adds to inflation pressures and makes it more likely that the Fed will maintain a restrictive monetary policy stance for a longer period.
The Fed is expected to keep interest rates unchanged in the range of 5.25%-5.50% for the fourth consecutive time at the monetary policy meeting on January 31. Market participants will focus on the commentary about how the Fed will fit the expected three interest rate cuts in the remaining seven policy meetings of 2024.
Daily digest market movers: Gold price advances while US Dollar corrects
Gold price extends recovery to near $2,030 as the US Dollar has turned sideways after a strong upside move.
The recovery in the Gold price is also backed by deepening geopolitical tensions, which have increased flows towards safe-haven assets.
The appeal for safe-haven assets is upbeat as the Iran military group is expected to retaliate for airstrikes launched by the US military targeting Houthis in Yemen.
In spite of supportive economic fundamentals, the Gold price is expected to end the week on a bearish note, weighed by lower Fed rate cuts bets due to a stable labor market, robust consumer spending, and a sticky inflation outlook.
US Retail Sales were robust in December due to a sharp increase in demand for motor vehicles and online purchases, which set a positive undertone for 2024. An upbeat retail demand has escalated fears for inflation remaining persistent.
US Initial Jobless Claims for the week ending January 12 fell significantly lower to 187K against expectations of 203K and the prior reading of 207K. This indicates that labor demand is upbeat despite the Fed maintaining interest rates at high levels.
Strong economic data strengthens the argument supporting a restrictive interest rate environment.
On Thursday, Atlanta Federal Reserve Bank President Raphael Bostic supported a reduction in interest rates, but only after the first half of this year as long as inflation declines towards the 2% target.
Bostic cautioned about premature interest rate cuts as they could decelerate the progress in the achievement of price stability. Also, early rate cuts could bring an uptick in retail demand and spoil entire efforts made to tame price pressures. Bostic endorsed two interest rate cuts this year, diverging from the Fed’s median projections of three rate cuts.
The US Dollar Index (DXY) sees a sharp contraction in volatility around 103.40. The USD Index trades slightly below its monthly high of 103.70, but it is expected to extend its recent recovery as investors scale back interest rate cut bets for March.
As per the CME Group Fedwatch tool, traders see a 53% chance for an interest rate cut by 25 bps in March, sharply down from the above 70% seen last week.
Technical Analysis: Gold price climbs above $2,030
Gold price jumped above $2,030 on Friday. The precious metal recovered strongly after finding buying interest near the psychological support of $2,000. The yellow metal rebounded after taking support from the 50-day Exponential Moving Average (EMA), which trades around $2,017. However, the 20-day EMA near $2,035 is still acting as a barrier for the Gold price bulls. The 14-period Relative Strength Index (RSI) rebounded after testing territory near 40.00.
More upside could appear if Gold manages to stabilize above the $2,030 resistance, while the downside move could gain traction on a breakdown below the psychological supportof $2,000.
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.
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