Markets Reevaluate Early Federal Reserve Rate Cut Expectations
Gold prices in Asian trade experienced a slight recovery on Tuesday, bouncing back from a challenging start to the year. The market sentiment shifted as expectations for early interest rate cuts by the Federal Reserve were reassessed ahead of crucial U.S. inflation data scheduled for release later in the week.
The yellow metal had faced a significant drop below the $2,050 an ounce level in the past week, aligning with a rebound in the dollar. The strong labor market data led to uncertainties about the Fed‘s inclination to initiate policy easing early in the year.
However, gold prices found some relief this week as the dollar retreated from three-week highs, driven by profit-taking. Despite this, the yellow metal remained below the highs reached in December.
Spot gold increased by 0.2% to $2,032.91 per ounce, while gold futures expiring in February rose 0.3% to $2,038.85 per ounce.
U.S. Inflation Data Impact on Rate-Cut Expectations
Traders maintained a strong bias towards the dollar in anticipation of key consumer price index data scheduled for release on Thursday. The data is expected to indicate a mild uptick in December’s inflation. Coupled with the robust nonfarm payrolls reading, this gives the Federal Reserve more room to keep interest rates higher for an extended period.
The revised expectations for early interest rate cuts impacted gold’s performance, resulting in a reduction of gains made in December. Despite this setback, gold concluded 2023 with a 10% gain.
Federal Reserve officials also countered expectations for early rate cuts. Atlanta Fed President Ralph Bostic expressed a bias towards maintaining tight policy in the near term, given inflation levels well above the Fed’s 2% annual target. Bostic anticipates eventual rate cuts in 2024 but flagged a smaller cut of around 50 basis points, contrary to market expectations.
Traders were observed adjusting bets on a Fed rate cut in March, with the CME Fedwatch tool indicating a reduced probability of 59.4%, down from 64% on Monday and 70.7% a week ago. The prospect of higher rates for a more extended period negatively impacts gold, as it elevates the opportunity cost of investing in the metal, which offers no yield.
Copper Prices Stable Amid Dollar Pressure and China Economic Data Anticipation
In the realm of industrial metals, copper prices exhibited little movement on Tuesday, influenced by a robust dollar and cautious anticipation of crucial economic data from top copper importer China.
Copper futures expiring in March witnessed a marginal 0.2% rise to $3.8288 per pound after experiencing a more than 2% decline in the initial week of 2024.
Apart from U.S. data, the focus this week is on Chinese inflation and trade figures for December, scheduled for release on Friday. China, the world’s largest copper importer, is expected to exhibit disinflation in December, with potential decreases in trade activity, particularly exports.
Despite overall economic challenges, China’s copper imports remained surprisingly resilient through most of 2023. The upcoming data will shed light on whether this trend persisted in December.
