Gold price continues losing spell as hot inflation pushes back Fed rate-cut expectations

LONDON (February 14) Gold price (XAU/USD) continues its five-day losing streak on Wednesday as hot United States inflation data suggests the Federal Reserve (Fed) will hold back from cutting interest rates at its monetary policy meeting in May. The opportunity cost of holding non-yielding assets, such as Gold, has risen as the Fed is expected to keep interest rates at their current level for a longer period. 

The absence of evidence ensuring the return of the underlying inflation to the 2% target has strengthened the need to maintain a hawkish narrative on interest rates. Fed policymakers are not expected to bring down critical rates until they see price pressures easing for a decent period. 

The US Consumer Price Index (CPI) grew faster than market expectations due to an uptick in rental and healthcare costs. 

Contrary to market action, US Treasury Secretary Janet Yellen said on Tuesday there is progress in the war against persistent inflation despite surging rental prices.

Daily Digest Market Movers: Gold price falls, weighs down by upbeat US Dollar

• Gold price declines toward a two-month low of around $1,975 as stubborn United States inflation data for January has cooled down expectations of rate cuts by the Federal Reserve in the May monetary policy meeting.
• The CME Fedwatch tool now shows that traders see a 38% decline in interest rates by 25 basis points (bps) for the May meeting, which was almost 50% before the release of the US inflation data.
• On Tuesday, the US Bureau of Labor Statistics (BLS) showed that core inflation rose steadily by 3.9%, while the headline inflation grew at a moderate pace of 3.1% against expectations of 2.9%.
• The Fed generally considers core inflation data for preparing monetary policy remarks, and sticky underlying price pressures are sufficient for Fed policymakers to maintain their hawkish rhetoric. 
• Now, expectations for a rate cut have shifted to the June monetary policy meeting as stubborn price pressures would allow Fed policymakers to emphasize holding interest rates in the range of 5.25%-5.50% for a longer period.
• The interest rate decision is widely anticipated to remain unchanged for the March monetary policy meeting.
• Meanwhile, the US Dollar Index (DXY) has refreshed a three-week high at 104.90 amid a dismal market mood. The US Dollar attracts higher foreign inflows if the Fed maintains a restrictive stance.
• 10-year US Treasury yields have corrected mildly to 4.29% in the London session on Wednesday but are still almost 3% high this week.
• Going forward, market participants will focus on the monthly US Retail Sales data for January, which will be published on Thursday.
• Investors anticipate that Retail Sales dropped by 0.1% against a 0.6% increase in December. This might weigh on the US Dollar as weak sales at retail stores indicate a decline in household spending.

FXStreet