The price of gold (XAU/USD) maintained its position within Thursday’s trading range as market attention shifts to the upcoming United States Consumer Price Index (CPI) data for January, scheduled for release on Tuesday. Investors are keenly awaiting the inflation figures for insights into the potential timeline for the Federal Reserve (Fed) to consider interest rate reductions. A sooner-than-expected rate cut could benefit gold prices by reducing the opportunity cost of holding a non-yielding asset.
The current sentiment reflects a diminished confidence among investors in the likelihood of the Fed easing interest rates as early as May. The CME FedWatch tool indicates a reduced probability, with chances of a 25 basis points rate cut in May now standing at 51%.
Fed policymakers have consistently stressed the importance of maintaining interest rates until there is sufficient evidence that inflation will sustainably return to the target of 2% and labor market conditions remain robust. Positive trends in the US labor market support this stance, with weekly jobless claims consistently declining. In the week ending February 2, new claims for jobless benefits stood at 218K, below expectations of 220K and the previous release of 228K. These data points suggest a reduced need for interest rate cuts to stimulate economic growth.
As confidence wanes in the Fed’s inclination to ease rates from May onward, the broader appeal of the US Dollar strengthens. The negative correlation between the US Dollar and gold prices implies that a more hawkish stance by the Fed, characterized by higher interest rates, could attract higher foreign outflows, potentially impacting gold prices. The upcoming US inflation data will play a pivotal role in shaping expectations and influencing the precious metal’s performance in the coming weeks.
