Forex Market Analysis: Gold Prices React to CPI Data: Fed’s Response and Market Implications

February 14, 2024

CURRENCIES:

Gold Price Analysis Following US CPI Data

• Gold prices dropped to a two-month low after US CPI data indicated higher inflation than expected, influencing a hawkish view on Federal Reserve interest rate decisions.
• This inflation report led to higher U.S. Treasury yields and strengthened the U.S. dollar, negatively impacting gold prices.
• If inflation doesn’t decrease, the Fed might postpone interest rate cuts, potentially keeping bond yields and the U.S. dollar high for an extended period, further pressuring gold.

Technical Outlook for Gold

• After breaking below $2,005, gold targeted the 50-day simple moving average around $1,990.
• A further decline could see gold heading towards $1,975, with $1,965 as the next significant level to watch.
• Conversely, a price recovery seems unlikely without positive drivers, but if it occurs, resistance is expected near $2,005 and then around the 50-day simple moving average at $2,030.

STOCK MARKET:

Fed’s Response to Inflation Data in 2024

• The recent hot inflation report supports the Federal Reserve’s cautious stance on rate cuts, with officials signaling a need for more time.
• Market expectations have adjusted, now anticipating a nearly 80% chance of a rate cut by June, a delay from earlier predictions of a May start.

Inflation Metrics Exceed Expectations

Fed Officials and Market Reactions

• Fed Chair Jay Powell emphasized the need for continued good data before adjusting monetary policy, indicating a cautious approach to rate cuts.
• Other Fed officials, including those from the Richmond, Boston, and Cleveland Fed, echoed the sentiment for patience, aligning with Powell’s cautious outlook.

Inflation Data’s Impact on Fed Policy

• Despite some positive inflation trends, the Fed is waiting for a full year of data showing a move towards the 2% target, likely marking June as a critical month.
• Investors had initially hoped for an aggressive Fed response with rate cuts as early as March, but recent statements and data have tempered those expectations.

Political and Economic Implications

• The Fed’s cautious stance places it at the center of potential political controversy, especially in an election year, with figures from both political sides ready to critique the timing of rate cuts.
• The focus on shelter prices and services excluding shelter indicates areas of persistent inflation, with the Fed’s preferred inflation measure, the “core” Personal Consumption Expenditures index, showing more improvement in December than CPI.
• The Bureau of Labor Statistics reported a 0.3% monthly and 3.1% annual rise in the Consumer Price Index (CPI) for January, exceeding forecasts.
• Core inflation, excluding food and gas, also rose more than expected, at 0.4% monthly and 3.9% annually, doubling the Fed’s 2% target.

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