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

February 29, 2024

NEW YORK (February 29) Gold price (XAU/USD) remains in a tight range in Thursday’s 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 won’t 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 Fed’s preferred inflation tool. It doesn’t 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 Fed’s 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.

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