Gold stays firm amid risk-off mood, high US Treasury yields
- Gold price hovers around $2,180.60, steadying as traders anticipate February’s CPI release.
- Core inflation expectations set to influence the US Dollar and potentially bolster Gold’s position.
- Following Powell’s testimony, Gold’s near breakthrough to $2,200 underlined XAU’s price sensitivity to Fed policy and inflation trends.
Gold prices were virtually unchanged late in the North American session with traders bracing for the release of February’s US Consumer Price Index (CPI) data, which is estimated to stay unchanged for headline figures. Core data is foreseen cooling down, which would weigh on the US Dollar and boost XAU/USD. At the time of writing, Gold price trades at $2,180.60, almost flat.
Last week, Gold price printed an all-time high of $2,195.15, shy of cracking the $2,200 figure following US Federal Reserve (Fed) Chair Jerome Powell’s testimony at the US Congress, in which he acknowledged that inflation is heading lower. Powell noted that eventually, the Fed would begin to ease policy but emphasized that the central bank remains data-dependent. Despite saying the US central bank is close to feeling confident that inflation is edging lower, the Fed Chair said they’re in no rush to cut borrowing costs.
Daily digest market movers: Gold’s last leg up sponsored by weak US NFP data
- The US labor market is cooling down despite printing solid gains in February compared to “downward revised” figures from January. After two months of net revisions, the US jobs market totaled a loss of -167,000 jobs compared with initial prints, which sparked a reaction from interest rate futures traders.
- According to the CME FedWatch Tool, expectations for a May rate cut remain low at 22%, but the odds are at 69% for June.
- February US CPI is expected to rise from 0.3% to 0.4% MoM and remain unchanged at 3.1% YoY.
- Core CPI is estimated to drop from 0.4% to 0.3% MoM and from 3.9% to 3.7% YoY.
- Federal Reserve officials last week expressed that they remain data-dependent and want to feel secure that inflation is sustainably trending toward the Fed’s 2% goal. Therefore, Tuesday’s inflation report would be relevant, as a jump in prices could trigger a U-turn in XAU/USD prices.
- XAU/USD is being capped by US Treasury bond yield recovery as the 10-year benchmark note rate gained two basis points at 4.094%.
Technical analysis: Gold stays firm near all-time highs near $2,180
Gold’s rally appears overextended after extending toward the $2,180.00 figure. Even though the Relative Strength Index (RSI) is overbought above the 80 level, RSI’s slope aims up, suggesting that buyers remain in charge. If buyers push the XAU/USD price above the ATH at $2,195.15, that could open the door to testing $2,200.00.
On the flip side, if XAU/USD falls below March’s 8 low of $2,154.17, a drop toward the $2,150.00 figure is on the cards. Further support is seen at $2,100.00, ahead of the December 28 high at $2,088.48 and the February 1 high at $2,065.60.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.