Gold price plunges ahead of US Retail Sales, Fed Waller's commentary

NEW YORK (January 16) Gold price (XAU/USD) witnesses a sell-off after failing to reclaim the weekly high above $2,060. The precious metal drops as investors reconsider the timeframe in which the Federal Reserve (Fed) may reduce interest rates. This comes after the release of the sticky Consumer Price Index (CPI) report for December, as well as hawkish comments from European Central Bank (ECB) officials recalibrating broader market expectations.

While markets continue to lean towards a rate cut decision in March, policymakers are in no hurry to endorse a dovish stance on interest rates. The consumer price inflation in the United States economy is almost double the required rate of 2%, labor demand is steady and the chances of a recession are low despite interest rates remaining in the range of 5.25-5.50%. This would allow Fed policymakers to maintain a restrictive monetary policy stance for the time being.

Going forward, monthly US Retail Sales, the Industrial Production data and the Fed’s Beige Book are expected to provide fresh cues about the interest rate outlook. 

Daily Digest Market Movers: Gold price drops sharply while US Dollar refreshes weekly high

• Gold price corrects to near the crucial support of $2,040 as the US Dollar Index (DXY) has recovered sharply ahead of crucial United States economic data for December.
• A strong run-up in the precious metal that was propelled by firm bets in favour of early rate cuts by the Federal Reserve and deepening Middle East tensions, has stalled for now.
• As per the CME Fedwatch tool, chances in favour of an interest rate cut in March have eased nominally to 66% against 70% recorded earlier.
• A gradual decline has come as investors are reconsidering strong optimism for Fed starting the rate-cut cycle from March after getting mixed cues from stubbornly higher headline consumer price inflation and softer factory gate price data.
• Investors would get more cues about when the Fed could plan rate cuts after the release of the monthly US Retail Sales and Industrial Producer data, which are due to be released on Wednesday.
• Retail Sales are expected to have grown at a higher pace of 0.4% against 0.3% increase in November. Consumer spending excluding automobiles is estimated to have grown at a steady pace of 0.2%. 
• The Industrial Production data is seen stagnant against 0.2% growth in November on a monthly basis.
• Upbeat economic data would comfort Fed policymakers for maintaining a restrictive monetary policy stance while a soft report will firm the case of rate cuts in March.
• Before that, commentary from Fed Governor Christopher Waller will be keenly watched by  market participants. Investors are eager to know how the Fed is considering the timeframe for the rate-cut cycle after the release of sticky consumer price inflation data.
• The appeal for the Gold price has not been impacted on a broader basis as crises in the Middle East region have deepened after the airstrikes from the US and the United Kingdom. 
• Iran-backed Houthi rebels have threatened to retaliate for attacking groups in Yemen, which will keep risk sentiment on its toes.
• The US Dollar Index has broken to a new high slightly above 103.00 as investors hope that other central banks will also start reducing interest rates earlier than previously projected. Meanwhile, the 10-year US Treasury yield has rebounded swiftly above 4.0%.

FXStreet