. Gold Price Rallies on Soft US Inflation - Capital Street FX

Gold Price Rallies on Soft US Inflation

Gold Price Rallies on Soft US Inflation

29 Feb 2024

The price of gold rallies in response to the soft US Core PCE Price Index

  • The increase in gold prices is attributed to the continued softness in the US Core PCE Price Index data for January.
  • This underlying inflation data fosters expectations of potential rate cuts by the Federal Reserve.
  • According to Fed’s Collins, the path to achieving 2% inflation is anticipated to be challenging.

In the early American session on Thursday, the price of gold (XAU/USD) exhibited a robust rebound, driven by the anticipated softening of the United States Core Personal Consumption Expenditure Price Index (PCE) for January. The subdued underlying inflation data is likely to bolster expectations of potential rate cuts by the Federal Reserve (Fed) in the upcoming June monetary policy meeting. The perceived opportunity cost of holding non-yielding assets like gold diminishes when the Fed contemplates rate cuts.

As anticipated, the annual inflation data slowed down to 2.8% from December’s 2.9%. The monthly core PCE Price Index data registered a 0.4% increase, in line with market predictions. December saw a modest growth of 0.2% in the underlying inflation.

This development is likely to reduce the attractiveness of the US Dollar and bond yields. Typically, the US Dollar attracts foreign inflows when the Federal Reserve transitions from a hawkish stance to a neutral guidance.

Market participants were anticipated to closely monitor this, as it serves as the Federal Reserve’s preferred inflation gauge. It remains unaffected by base effects and offers a clear perspective on underlying inflation by excluding volatile items.

Despite the inflation report coming in softer than anticipated, the market does not foresee a substantial increase in expectations for rate cuts in the March and May policy meetings. Federal Reserve policymakers typically require consistent and positive inflation data over several months to contemplate a shift in monetary policy stance. Hence, a single instance of progressively declining inflation data would not be sufficient to prompt policymakers to quickly reverse their restrictive policy stance.

The price of gold rebounds as the US Dollar gives up its gains.

The price of gold sees a sharp recovery, surpassing $2,040, as the anticipated decline in the annual United States Core PCE Price Index data for January materializes.

The economic data is anticipated to ignite market expectations for Federal Reserve rate cuts in June.

Presently, the CME FedWatch Tool indicates a forecast of unchanged interest rates within the range of 5.25%-5.50% for the upcoming policy meetings in March and May. Traders are assessing a 53% probability of a 25 basis points rate cut in the June meeting.

It will be interesting to observe if Federal Reserve policymakers specify a definite timing for rate cuts in response to the deceleration in growth of price pressures.

In remarks made on Wednesday, John Williams, the President of the New York Federal Reserve, emphasized that the determination regarding rate cuts will hinge on incoming data. Williams further noted that while the central bank has made significant progress in reducing inflation to the 2% target, there is still more work to be done.