Gold strengthens as Fed rate cut bets increases, Middle East tensions deepen

NEW YORK (January 12) Gold price (XAU/USD) has generated significant gains as investors are confident about an interest rate cut by the Federal Reserve (Fed) at its monetary policy meeting on March 20 – such a move would support non-yielding assets such as Gold. The probabilities of an early interest rate cut are assessed as firmer despite consumer price inflation in the United States remaining stubbornly high in December, amid a significant increase in rental prices and healthcare costs. 

Meanwhile, soft US Producer Price Index (PPI) numbers for December and deepening Middle East tensions have strengthened near-term demand for bullions.

Monthly headline PPI continues to contract by 0.1% against expectations of 0.1% growth. The annual headline PPI accelerated at a slower pace of 1.0% while investors projected a 1.3% growth against 0.8% increase in November. The monthly core PPI continues to remain stagnant against a 0.2% growth projection while prices of core goods and services at factory gates were decelerated to 1.8% versus. consensus of 1.9% and the former reading of 2.0% on an annual basis. 

Tensions in Middle East have deepened as the US & UK military have launched airstrikes on Houthi targets in Yemen in retaliation for attacking merchant vessels shipping from Red Sea. This has increased fears of widening conflicts in the Middle East as Iran could potentially enter in Israel-Hamas war at Gaza.

While market participants continue to commit funds toward Gold amid optimism over early rate cuts, Fed policymakers will stick to a restrictive interest rate stance as price pressures in addition to the required rate of 2% are highly sticky, due mainly to stable labor market conditions. Fed policymakers have been reiterating that a lot of work has yet to be done in order to gain confidence that the underlying inflation will return to 2% in a sustainable manner.

Bank of Chicago Federal Reserve President Austan Goolsbee, on Thursday, stressed  a data-dependent approach and said that there were weeks and months of data to come, to help guide when and how much rates should be reduced. Cleveland Fed President Loretta Mester said she needed more evidence to confirm inflation declining towards 2% in a timely manner before jumping on the bandwagon of rate-cut discussions.

Daily Digest Market Movers: Gold price strengthens as geopolitical tensions improve safe-haven appeal

• Gold price moves sharply higher, close to $2,040 as investors remain optimistic about a rate cut by the Federal Reserve in March despite a healthy increase in the headline inflation and sticky core CPI data for December.
• The annual core inflation rate decelerated slightly to 3.9% (from 4.0% in November) while headline CPI rose significantly to 3.4% due to elevated rentals and healthcare costs. Gasoline and food prices were up at a moderate pace of 0.2%.
• According to the CME FedWatch tool, chances lean towards an interest rate cut by 25 basis points (bps) in March, with a probability of above 66%.
• Investors are ignoring the fact that US labor market conditions are still healthy and the last mile in achieving price stability is turning out extremely stubborn. This could allow Fed policymakers to maintain arguments towards keeping interest rates elevated, at least until the second quarter ends.
• Stubbornly higher US inflation has set a hawkish undertone for the first interest rate policy of 2024 on January 31. 
• The Fed is widely anticipated to keep interest rates unchanged in the range of 5.25-5.50% for the fourth straight time, but the outlook for interest rates in March is expected to remain slightly hawkish. 
• After Fed policymakers: Raphael Bostic and John Williams, Cleveland Fed President Loretta Mester said March is probably too early for an interest rate cut decision as the Fed needs to see more evidence to be confident that inflation is progressively declining towards 2%. 
• Loretta Mester added that there is more work to do including the continued maintenance of a restrictive monetary policy. She further added that goods, housing and shelter costs need to ease further along with a slowdown in wage growth.
• The US Dollar Index (DXY) struggles for a firm-footing as investors are not ready to ditch support for rate cuts in March. 

FXStreet