- The rise in US inflation came amid economic resilience and labor market strength.
- Gold prices fell below $2000, reaching a two-month low.
- The Fed will likely take time before reversing its policy.
Gold prices plunged on Tuesday as the dollar and Treasury yields rose after an upbeat inflation report. After a long wait, investors finally saw the state of inflation in the US. According to the report, inflation remains persistent and higher than expected. Consequently, there was a decline in Fed rate cut bets.
The outlook for gold has dimmed as the possibility for early Fed rate cuts is fading. From the start of the year, investors have gradually adjusted their bets for these cuts. This also happened on Tuesday, with bets for a May rate cut dropping below 50%.
In the last policy meeting, Fed policymakers, including Powell, stated that they need evidence inflation is dropping to the 2% target level. Notably, the inflation report was consistent with the recent declining price pressure trend. However, inflation is falling much slower than markets had expected. Therefore, the Fed will likely take time before reversing its policy. Investors are currently looking at June for the possible start of rate cuts.
US inflation (Bureau of Labor Statistics, Bloomberg)
Investors focused on the core inflation figure that showed inflation heated up last month. Notably, the figure jumped from o.3% in December to 0.4% in January as the US shelter cost went up. The rise in inflation came amid economic resilience and labor market strength. However, the annual inflation figure showed a different story. Inflation fell, although by much less than what economists had expected.
After the report, the dollar surged, making gold more expensive for foreign buyers. At the same time, there was an increase in Treasury yields. Generally, gold seemed less attractive as an investment option on Tuesday as it has no yield. Consequently, gold prices fell below $2000, reaching a two-month low. As long as interest rates remain high, there will be pressure on gold prices. Therefore, there might be more downside for the yellow metal in the coming days.
After the consumer inflation report, the focus will shift to more high-impact data from the US. As the week unfolds, there will be a report on retail sales and wholesale inflation. Additionally, traders will seek policy outlook clues from Federal Reserve officials set to speak in the coming days.
