- The big question for gold traders is when the Fed will start cutting rates.
- A Reuters survey on Monday showed that there is a big chance that gold prices will hit record highs this year.
- There was an increase in US job vacancies in December.
Gold rose on Tuesday, reaching a two-week high as the dollar and Treasury yields declined. Investors were focused on the looming Fed decision on Wednesday, where they expect the central bank to keep rates unchanged. The big question for gold traders is when the Fed will start cutting rates. When interest rates in the US drop, the demand for gold increases as the opportunity cost of holding the yellow metal drops. Therefore, the sooner the Fed starts cutting rates, the better for gold prices.
A Reuters survey on Monday showed that there is a big chance that gold prices will hit record highs this year due to looming rate cuts. The Fed turned dovish at the December meeting when Powell indicated the likelihood of rate cuts in the US. However, some policymakers changed their tone when data came in higher than expected. A resilient US economy means the Fed still has work to do to lower inflation.
Meanwhile, bets for a rate cut as early as March have dropped, leading to expectations of a later start for rate cuts. Additionally, analysts believe that Powell will strike a neutral tone while hinting at the possibility of rate cuts.
The most recent data on US inflation revealed a slight increase. However, the key takeaway was the fact that inflation stayed below 3% for the third month in a row. This will likely allow the US central bank to start cutting rates.
US job openings (Source: Bureau of Labor Statistics)
Elsewhere, the US released a report on Tuesday showing an increase in job vacancies in December. This was yet another indicator of the resilience of the US labor market and the economy. However, there is no doubt that the labor market is slowly cooling off. The same report showed that people were not quitting their current jobs, which could lead to slower wage growth. The Fed is keen to see a drop in wage growth as it will contribute to lower inflation.
Moreover, gold is getting support from the ongoing geopolitical tensions. On Monday, gold rallied as tensions in the Middle East rose. The Gaza war has extended and now involves the US. These tensions will likely continue, keeping the demand for safe-haven gold high.