The price of gold (XAU/USD) rose above its highest level in two days, nearing $2190 during Tuesday's trading, coinciding with a downward correction in the US dollar. The dollar faces downward pressure as Federal Reserve officials grow more confident in easing inflationary pressures, with their projections of three interest rate cuts this year despite high inflation readings in January and February.
From my perspective, investors in the markets are now seeking new signals regarding inflation expectations to gauge when the Federal Reserve will begin to cut interest rates. The market will closely focus on the release of the US Personal Consumption Expenditures (PCE) Price Index for February, which will be published on Friday, coinciding with official holidays in the US and Europe, extending market pricing for this data until the beginning of next week, coinciding with the monthly market opening.
Any signs of monetary policy easing could strengthen gold prices as it would diminish hopes for the Federal Reserve to keep interest rates high for longer. However, stubborn inflation data may negatively impact gold prices as it increases the opportunity cost of investing in gold. Instead, investors may opt for interest-bearing assets like bonds, which would become more attractive due to rising yields. US 10-year Treasury yields have fallen to 4.24% amid strong expectations that the Federal Reserve will begin lowering interest rates starting June.
Therefore, traders and investors are likely to refrain from establishing strong new directional positions and may prefer to wait for more signals regarding the path of interest rate cuts by the Federal Reserve, which in turn will dictate the direction of gold prices, which do not yield short-term returns. Thus, the market focus will remain on the release of the US Consumer Price Index and Personal Consumption Expenditures Index, the preferred inflation gauge by the Federal Reserve, on Friday. Additionally, today's US economic calendar includes the release of Durable Goods Orders, the Consumer Confidence Index, and the Richmond Manufacturing Index, which may provide some weak directional momentum for gold traders.
The US Dollar Index (DXY) has retreated from multi-week highs around 104.50 to hover around 104.20. However, US Treasury yields have slightly risen, with the 10-year yield reaching 4.25% today. Caution is warranted when opening any new positions on the gold price.
From my perspective, the current rise in the yellow metal is attributed to higher expectations for interest rate cuts in 2024. The Core Personal Consumption Expenditures Index is expected to show a 0.4% increase every month on Friday, while the headline figure is expected to rise by 0.3% every month. This coincides with traders' expectations of a 70% probability of interest rate cuts in June, up from 65% before the Federal Reserve meeting last week, which may result in the price entering a sideways trading zone in the short term.
Geopolitically, Russia recently carried out one of its largest missile and drone attacks on energy infrastructure in Ukraine, the widest and fiercest since its invasion of Ukraine over two years ago, amidst escalating tensions in Gaza, which drag the region into further tension. This coincides with yesterday's United Nations Security Council resolution calling for an immediate ceasefire, which has not been complied with so far. Therefore, increasing geopolitical tensions in both Eastern Europe and the Middle East could boost safe-haven flows and undoubtedly benefit the rise in gold prices.
However, I believe the future of the gold price will primarily depend on investors' and markets' focus on US Consumer Confidence numbers on Friday, Durable Goods Orders, and the FHFA House Price Index released today. Then the Annual Gross Domestic Product report for the fourth quarter (Q4) of the United States on Thursday, which will clarify the future of Federal Reserve monetary policies and thus affect price movements in the financial markets.
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