Gold price plunges amid uncertainty over US Inflation data

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  • Gold price falls vertically amid caution ahead of the US inflation data for January.
  • Fed policymakers could maintain their hawkish rhetoric if inflation turns out stubbornly high.
  • The US Dollar rebounds strongly amid a dismal market mood.

Gold price (XAU/USD) faces an intense sell-off in Monday’s early New York session ahead of the United States Consumer Price Index (CPI) data for January. In addition, major Asian markets are closed on Monday due to the Chinese New Year. 

The precious metal remains on edge ahead of US inflation data for January, which may impact the outlook on interest rates. The opportunity cost of holding non-yielding assets, such as Gold, increases if inflation remains stubbornly high as it increases the odds of a hawkish stance from the Federal Reserve (Fed).

Fed policymakers have maintained arguments in favor of higher interest rates for longer until they get confidence that the underlying inflation will sustainably return to the 2% target. The reasoning behind the Fed’s hawkish narrative is the resilient labor market and robust household spending. Fed policymakers have admitted that the inflation data decline is encouraging but is insufficient to unwind the tight interest rate stance. 

Daily Digest Market Movers: Gold price drops significantly in a holiday-thinned trade

  • Gold price dives below $2,020 in holiday-thinned trade as major Asian markets such as China, Hong Kong, Japan, South Korea, and Singapore are closed. 
  • The precious metal is expected to remain on the backfoot as investors await the United States inflation data for January, which will provide fresh guidance on interest rates.
  • The CME FedWatch tool shows that traders see a 53% chance that a rate cut by 25 basis points (bps) could be announced in May.
  • According to the expectations, monthly headline inflation is expected to grow at 0.2% in January versus 0.2% in December (revised down from 0.3% initial estimate). In the same period, the core inflation that strips off volatile food and Oil prices is expected to show a rise of 0.3%.
  • For annual data, investors anticipate that the headline inflation softened significantly to 3.0% from 3.4% in December. While the core CPI decelerated slightly to 3.8% against the prior reading of 3.9%.
  • A stubborn inflation data would allow Federal Reserve policymakers to strongly argue in favor of keeping interest rates higher for a longer period.
  • Fed policymakers have been reiterating the need for good inflation data for months to ensure inflation sustainably declining towards the 2% target.
  • Dallas Federal Reserve Bank President Lorie Logan said on Friday that there is no need to rush for rate cuts as she wants to confirm durability in progressively declining inflation.
  • Meanwhile, the US Dollar Index (DXY) delivers a sharp recovery from the crucial support of 104.00 as investors turn cautious ahead of the US inflation data. The appeal for safe-haven assets improves amid a cautious market mood.

Technical Analysis: Gold price breaks below $2,020

Gold price falls below $2,020 as it hovers near the upward-sloping border of a Symmetrical Triangle chart pattern plotted from the December 13 low at $1,973. While, the downward-sloping trendline border of the same pattern from the December 28 high is at $2,088. The Gold price drops slightly below the 50-day Exponential Moving Average (EMA), which trades around $2,023.

The 14-period Relative Strength Index (RSI) oscillates inside the 40.00-60.00 range, indicating a prolonged sideways trend.

Fed FAQs

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.

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.

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.

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.