The Fed appears to be confident that inflation is easing toward the 2% target.
Investors await the US core PCE inflation for fresh guidance.
Gold price (XAU/USD) soars to $2,200 in Wednesday’s European session amid multiple tailwinds. The main driver is that expectations for the Federal Reserve (Fed) reducing interest rates from the June meeting remain firm. These expectations, which also price in two more cuts by the end of the year, have strengthened the appeal of Gold.
On Monday, Chicago Fed Bank President Austan Goolsbee cautioned that the inflation outlook is uncertain due to higher housing inflation. However, he remained confident that the fundamental story of inflation returning to the 2% target has not changed.
Firm market expectations for the Fed cutting rates in June have supported Gold prices as it lower the opportunity cost of investing in it. Meanwhile, 10-year US Treasury yields are slightly up at 4.24% but remain inside Tuesday’s trading range as investors await the crucial United States core Personal Consumption Expenditure (PCE) price index for February, which will be published on Friday. The underlying inflation data will significantly influence Gold prices as it will provide some clues over the time frame in which the Fed intends to start cutting interest rates.
The US Dollar Index (DXY), which measures Greenback’s value against six major currencies, retreats slightly from 104.40.
Gold price rises to $2,190, aiming to recapture all-time highs of $2,223. Investors remain gung-ho for Gold as expectations for the Federal Reserve to begin rate cuts from the June policy meeting have strengthened.
The CME FedWatch tool shows that there is almost a 70% chance that a rate-cut cycle will get started in June. Last week, bets for the Fed lowering key borrowing rates from June were dashed by hot consumer price inflation readings. However, the release of the latest dot plot – which pointed out that officials still expect three rate cuts in 2024 – has renewed hopes of upcoming rate cuts.
The Fed is confident that the underlying story of inflation easing to 2% has not changed despite back-to-back stubborn Consumer Price Index (CPI) data in the first two months of 2024. However, the Fed didn’t offer any cues about when it could start cutting rates.
This week, the release of the United States core PCE price index data for February will provide fresh cues about Fed rate cut timing. Uncertainty over the timing of rate cuts could deepen if the inflation data turns out hotter than expected.
Core PCE is estimated to have grown steadily by 2.8%, with monthly growth declining to 0.3% from 0.4% in January. A stubborn inflation data would dampen the Gold’s appeal as hot inflation figures could delay the Federal Reserve’s plans to reduce interest rates. On the contrary, soft inflation figures could hit the US Dollar and US bond yields, supporting demand for Gold.
But before that, investors will focus on the speech from Fed Governor Christopher Waller, who will speak at 22:00 GMT about the US economic outlook before the Economic Club of New York. Investors will keenly focus on fresh guidance on interest rates.
Gold price jumps above $2,190 amid multiple tailwinds. The precious metal is aiming to recapture the all-time highs slightly above $2,220. The near-term demand is upbeat as all short-to-long term Exponential Moving Averages (EMAs) are sloping higher.
The Gold price could face a hurdle near $2,250, which coincides with the 161.8% Fibonacci extension level, after breaking above the resistance of $2,220. The Fibonacci tool is plotted from December 4 high at $2,144.48 to December 13 low at $1,973.13. On the downside, December 4 high at $2,144.48 will support the Gold price bulls.
The 14-period Relative Strength Index (RSI) rebounds after cooling down to 64.00 from an extremely overbought zone.
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
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