Forex News

12:14:06 29-02-2024

Gold price consolidates as focus remains on US core PCE Price Index

  • Gold price awaits the US core PCE Price Index data for a decisive move.
  • The underlying inflation data will sharpen the interest rate outlook.
  • Feds Collins expects the Feds path to 2% inflation will be bumpy.

Gold price (XAU/USD) remains in a tight range in Thursdays European session as investors seek fresh guidance on the interest rate outlook. The precious metal will be guided by the United States core Personal Consumption Expenditure Price Index (PCE) for January, which will be published at 13:30 GMT. The underlying inflation data will indicate whether Federal Reserve (Fed) policymakers are getting evidence, which could convince them that inflation will sustainably return to the 2% target.

Fed policymakers wont be interested in lowering interest rates if price pressures remain stubborn. This would improve the appeal of the US Dollar and bond yields. The US Dollar generally attracts higher foreign inflows when the Fed maintains hawkish guidance on interest rates.

The market expectations for rate cuts in the March and May policy meetings are not expected to heighten significantly even if the inflation report turns out softer. Fed policymakers need good inflation data for months to consider a change in the monetary policy stance. Therefore, one good progressively declining inflation data point would not be enough to force policymakers to swiftly unwind their restrictive policy stance.

Daily Digest Market Movers: Gold price remains sideways ahead of US inflation data

  • Gold price remains sideways, slightly below $2,040, as investors await United States core PCE Price Index data for January.
  • Market participants will pay close attention as it is the Feds preferred inflation tool. It doesnt get distorted by base effects and provides a clear view of underlying inflation by excluding volatile items.
  • Economists forecast underlying inflation data to decelerate to 2.8% from 2.9% in December on a year-on-year basis. The monthly core PCE Price Index data is forecast to have increased by 0.4% against a moderate growth of 0.2% in December.
  • The economic data is expected to significantly impact market expectations for the timing of Federal Reserve rate cuts.
  • Ahead of the underlying inflation data, the CME FedWatch Tool shows that interest rates will remain unchanged in the range of 5.25%-5.50% in the next two policy meetings, which will take place in March and May. Traders see a 53% chance for a rate cut by 25 basis points in the June meeting.
  • The opportunity cost of holding non-yielding assets, such as Gold, would increase if the inflation data remains stubborn. Therefore, hawkish commentaries from Fed policymakers have been maintaining downward pressure on the Gold price.
  • On Wednesday, New York Federal Reserve President John Williams said the decision on rate cuts will be dependent on incoming data. Williams added that the central bank has come a long way to bring down inflation to the 2% target, but there is more work to do.
  • Boston Fed Bank President Susan Collins sees the Feds path returning to 2% as bumpy due to tight labor market conditions and higher inflation readings in January. Collins expects that the Fed will start reducing interest rates later this year.

Technical Analysis: Gold price trades sideways around $2,030

Gold price oscillates inside Wednesdays trading range. The broader trend of the precious metal is sideways, trading in a Symmetrical Triangle, which could break out in either direction. However, the odds marginally favor a move in the direction of the trend before forming the triangle in this case, up. A decisive break above or below the triangle boundary lines would indicate a breakout is underway. 

The downward-sloping border of the Symmetrical Triangle pattern is plotted from the December 28 high at $2,088, and its upward-sloping border from the December 13 low at $1,973.

The 14-period Relative Strength Index (RSI) remains confined in the 40.00-60.00 range, indicating a sideways trend.

Gold FAQs

Why do people invest in Gold?

Gold has played a key role in humans history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesnt rely on any specific issuer or government.

Who buys the most Gold?

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a countrys solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

How is Gold correlated with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

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