Gold price falls sharply amid uncertainty over US Inflation data

Source Fxstreet
  • Gold price drops sharply as investors turn cautious 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 a sharp sell-off in Monday’s London 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 falls in a holiday-thinned trade

  • Gold price drops sharply to near $2,020 despite a 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 continue with a sideways trend 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 seems on tenterhooks around $2,020

Gold price is at a make or a break level around $2,020 as it is hovering 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.

Gold FAQs

Why do people invest in Gold?

Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.

Who buys the most Gold?

Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.

How is Gold correlated with other assets?

Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.

What does the price of Gold depend on?

The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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