Gold rally paused after hot US inflation data

Gold prices rose to an all-time high of 2,190 per ounce on Friday. Gold prices remained firm on Monday, trading above 2,180 per ounce. Gold’s rally was arrested on Tuesday, however, after the release of the US inflation report and gold prices retreated to 2,155 per ounce. If gold prices increase, resistance may be encountered at the psychological level of $2,200 per ounce, while if gold prices decline, support may be encountered near $2,080 per ounce. 

Gold prices have experienced a meteoric rise in the past two weeks and are currently trading in overbought territory. The dollar’s decline, combined with the rise in demand for safe-haven assets due to the war in Gaza, has propelled gold prices upward. The rally of gold prices was halted on Tuesday, though, on a hooter-than-expected US inflation print.

Gold prices are influenced by US fundamentals. Tuesday's highly anticipated US CPI data showed an uptick in US inflation in February. February’s inflation was hotter than anticipated and may set back the Fed’s plans to reduce interest rates. US Headline inflation rose by 3.2% year-on-year in February from a 3.1% print in January and against expectations of a steady print of 3.1%%. Monthly CPI rose by 0.4% in February, exceeding expectations of 0.3% growth. Core CPI, which excludes food and energy, also rose by 0.4% against the 0.3% raise anticipated. 

Market expectations of early Fed rate cuts dropped further as US inflation surprised on the upside, boosting the dollar, and putting pressure on gold prices. The progress of disinflation in the US is not steady, limiting the odds of a Fed rate cut before June.

Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar surged on Tuesday, with the dollar index climbing to the 103.1 level. US treasury yields also gained strength, with the US 10-year bond yielding approximately 4.16%. 

The Fed kept interest rates unchanged at its latest monetary policy meeting within a target range of 5.25% to 5.50%. The Fed, however, has removed the tightening bias from its policy statement, indicating that the central bank is preparing to pivot to a less restrictive monetary policy, boosting gold prices.

Fed rate cut expectations are affecting gold prices. Odds of a rate cut in March are practically nil and in May are also below 10%. Rate cut odds in June are down to 50% from over 90% at the beginning of the year. In addition, only 25 basis points of rate cuts are priced in by June, against 50 bp before. Market expectations of rate cuts are becoming more moderate as policymakers have stated that they intend to start reducing interest rates slowly. 

Gold prices are propped up by rising geopolitical tensions, which raise the appeal of safe-haven assets. Concerns that the Geopolitical crisis in the Gaza area may spread to neighboring countries are raising demand for safe-haven assets, boosting gold prices. The war between Israel and Hamas is threatening to spill over the Middle East as tensions rise in the Red Sea area.

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Written by:
Myrsini Giannouli

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