Gold rallies as soft US inflation keeps hopes for Fed rate cut in June alive

Gold price rises as US core PCE Price Index data remain soft in January.
The underlying inflation data would deepen hopes of Fed rate cuts.
Fed’s Collins expects the Fed’s path to 2% inflation will be bumpy.

Gold price (XAU/USD) delivers a strong recovery in Thursday’s early American session as the United States core Personal Consumption Expenditure Price Index (PCE) for January softens as expected. The soft underlying inflation data is expected to heighten hopes of Federal Reserve (Fed) rate cuts in the June monetary policy meeting. The opportunity cost of holding non-yielding assets, such as Gold, drops when the Fed considers rate cuts.

As expected, the annual inflation data decelerated to 2.8% from 2.9% in December. The monthly core PCE Price Index data increased by 0.4%, which aligns with market expectations. In December, the underlying inflation grew at a moderate growth of 0.2%. This would dampen the appeal of the US Dollar and bond yields. The US Dollar generally faces foreign inflows when the Fed shifts from a hawkish stance to neutral guidance.

Market participants were expected to 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.

The market expectations for rate cuts in the March and May policy meetings are not expected to heighten significantly, even though the inflation report has turned out softer than expectations. 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 bounces back while US Dollar softens

Gold price recovers sharply above $2,040 as a decline in the annual United States core PCE Price Index data in January is in line with expectations.
The economic data is expected to flare up market expectations for rate cuts Federal Reserve rate in June.
Currently, 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.
It would be worth seeing whether Fed policymakers provide concrete timing for rate cuts amid slower growth in price pressures.
On Wednesday, New York Federal Reserve President John Williams said the rate-cut decision will depend 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.

Technical Analysis: Gold price climbs to near $2,050

Gold price strongly recovers, jumping close to $2,050 on soft inflation data. The precious metal may look for an upside break of the Symmetrical Triangle formed on a daily timeframe. Usually, a Symmetrical Triangle formation could break out in either direction. However, the odds marginally favor a move in the direction of the trend before forming the triangle – in this case, up. A decisive break above or below the triangle boundary lines would indicate a breakout is underway.

The downward-sloping border of the Symmetrical Triangle pattern is plotted from the December 28 high at $2,088, and its upward-sloping border from the December 13 low at $1,973.

The 14-period Relative Strength Index (RSI) approaches 60.00. A bullish momentum will trigger if the RSI (14) breaks decisively above the same.

(This story was corrected on February 29 at 14:15 GMT to say that Gold price recovers sharply above $2,040 as a decline in the annual United States core PCE Price Index data in January is in line with expectations. Not $2,00 as formerly written. And, Traders see a 53% chance for a rate cut by 25 basis points in the June meeting. Not 5% as formerly written )

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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