Gold price rebounds swiftly with US Inflation in focus

LONDON (February 13) Gold price (XAU/USD) delivers a swift recovery as the appeal of safe-haven assets improves amid escalating Middle East tensions. The recovery move in the Gold price will be tested by the United States Consumer Price Index (CPI) data for January, which will be published at 13:30 GMT. The consensus shows that price pressures are expected to have softened as the Federal Reserve (Fed) has been holding interest rates in the range of 5.25%-5.50% for longer. 

The inflation data will significantly impact the outlook for interest rates. Softer inflation would be positive for Gold as it makes it more likely interest rates will fall, lowering the opportunity cost of holding Gold, which is non-yielding. 

The Fed has been consistently pushing back expectations of aggressive rate cuts in 2024, believing that achieving its dual mandate (2% core inflation and full employment) remains out of sight. 

Labor demand in the US has remained robust and the scale of economic activities is improving significantly despite higher interest rates. Fed policymakers demand more evidence to ensure price stability as it is crucial for achieving the dual mandate before the commencement of the rate-cut campaign. Softer-than-expected inflation data would uplift hopes of rate cuts. 

Easing price pressures would build significant pressure on the US Dollar and bond yields, further supporting Gold since it is priced in US Dollars. Investors will take out liquidity from the US Dollar in a case of decelerating inflation data, as this would allow the Fed to roll back its hawkish interest rate stance.

Daily Digest Market Movers: Gold price clings to gains while US Dollar edges down

• Gold price extends its recovery to $2,025 as Middle East tensions have escalated.
• Iran-backed Yemeni Houthis continue to attack commercial ships traveling in the Red Sea, connected to the United States and the United Kingdom.
• The foreign inflows for non-yielding assets, such as Gold, increase in times of geopolitical uncertainty.
• Meanwhile, the primary trigger for the FX domain will be the US inflation data for January.
• The US annual headline inflation is forecast to rise at a slower pace of 2.9% from 3.4% in December. In a similar timeframe, the core inflation that excludes volatile food and oil prices is anticipated to decrease to 3.7% from 3.9%.
• On a monthly basis, investors anticipate the headline and core CPI rising steadily by 0.2% and 0.3%, respectively.
• Soft inflation would prompt expectations of a rate cut decision by the Federal Reserve (Fed).
• As per the CME FedWatch tool, traders see a 48% chance for a rate cut by 25 basis points (bps) that will drag interest rates in the range of 5.00%-5.25% in the May monetary policy meeting.
• Investors are not expecting a rate-cut decision by the Fed in March as Fed Chair Jerome Powell ruled out expectations in its latest monetary policy statement. 
• Fed policymakers have emphasized keeping interest rates in the restrictive trajectory amid less conviction over inflation declining towards the 2% target.
• The US Dollar Index (DXY) fell after reaching a three-day high as market mood improves ahead of the inflation data.
• This week, the volatility is expected to remain high as the US Census Bureau will report the Retail Sales data for January, which will throw some light on the scale of consumer spending.

FXStreet