Gold Price Forecast: US PCE inflation refuses to come down, XAU/USD sell-off continues

• Gold price remains bearish despite improving market mood.
• Core PCE accelerates again in January, disinflation trend is halted.
• US Dollar stays dominant across the board, denting XAU/USD.

Gold price continues to trend down on Friday as the US Dollar strength remains on most of the market board despite 10-year US Treasury bond yields declining below 3.9% on Thursday, which still failed to trigger gains for the yield-less bright metal, although it helped to limit the downside somewhat. The US Personal Consumption Expenditures (PCE) Price Index release, the Fed’s preferred measure of inflation, came out hot, with all monthly and annual figures for both the headline and the core numbers beating market expectations. Gold price is trading at year-to-date lows below $1,820.

Gold news: US Core PCE inflation stays hot

The Core PCE Price Index, the Fed’s preferred gauge of inflation, for the month of January surprised already high expectations by printing a monthly growth of 0.6% (vs 0.4% expected). Gold traders triggered another sell-off after the data posted by the US Bureau of Economic Analysis (BEA), as annual Core PCE inflation came also higher than expected (4.7% vs 4.3% expected, and higher than the 4.6% seen in December 2022.) 

Headline figures also were bigger than what the market consensus had priced in, and the market reaction has been straightforward, with Gold price triggering another sell-off leg, getting closer to $1,800.

Commerzbank bearish on Gold price as sentiment improves

Strategists at Commerzbank believe there is room for more downside on Gold price if US macroeconomic data keeps showing positive results:

The disappointment over the more restrictive Fed policy that we are likely to see after all has left its biggest mark on the Gold market. This is because US real interest rates have climbed again as a result. In this sense, a ‘good’ PMI in the US threatens to weigh on prices.

Gold price: US Treasury bonds, the US Dollar and inflation dynamics

Gold is a non-yielding asset – holding it does not provide regular revenue – so it usually remains negatively correlated with United States Treasury bond yields. The benchmark US 10-year bond yield was constantly on the rise for most of 2022 as a response to the Federal Reserve raising interest rates to combat skyrocketing inflation. 

Price pressures remain high early in 2023, but Consumer Price Index (CPI) readings in the US and other big economies have shown signs of slowing down, and economists project this disinflation trend to continue through the rest of the year. A prolongation of this trend should help Gold price regain some footing from the demand side.

Treasury yields are not the only asset to track for Gold price (XAU/USD). The yellow metal is primarily traded in US Dollar terms, which makes it really vulnerable to currency market action. When the USD rallies against other major currencies and becomes the go-to asset, like it has been doing for the most part of the last year, Gold price tends to trend down as well. Of course, US Treasury yields and the US Dollar are highly correlated, so these dynamics are intertwined. 

Gold price in 2023: Up-and-down action

Financial markets have been a two-tale story for the early part of 2023, in which Gold price has reflected in its price action like no other asset. XAU/USD rode an uptrend during all of January with the market optimism about inflation slowing down and constant Federal Reserve dovish talk, only to see a drastic turnaround back to the old dynamics in February after a hot US Nonfarm Payrolls (NFP) report. The US economy adding more than 500K jobs in the month of January shifted the market expectations for the Fed easing its monetary policy, and the US Dollar has come back to the market King throne.

Gold price opened the year at $1,823.76 and reached a year-to-date high of $1,960 on February 2, right in between the first Federal Reserve meeting of the year and the surprising release of the US jobs report for January. Since then, the ongoing downtrend has been relentless, reaching levels close to the yearly open, around $1,830.

Gold price daily chart