Fundamental Analysis

Gold Prices Pull Back Ahead of US Inflation Data

  • The US economy expanded more quickly than economists had predicted in Q4.
  • Most analysts anticipate a small US recession by the second half of 2023.
  • Initial jobless claims for state benefits in the US decreased by 6,000.

Gold prices fell on Friday, while the dollar rose as investors awaited US inflation data later in the day to determine the Federal Reserve’s likely stance on additional interest rate hikes.

The dollar index increased by 0.2%. Bullion priced in dollars is more expensive for holders of foreign currencies when the dollar is stronger.

According to Ajay Kedia, director at Kedia Commodities, Mumbai, gold is seeing a pullback because the dollar is on the stronger side and the US GDP report is also significantly depressing prices.

US GDP, consumer spending (Source: Bureau of Economic Analysis)
US GDP, consumer spending (Source: Bureau of Economic Analysis)

Data released on Thursday revealed that the US economy expanded more quickly than economists had predicted in the December quarter, sparking speculation that the Fed may maintain higher interest rates for longer.

However, with most analysts anticipating a small recession by the second half of 2023, this may have been the last quarter of strong growth before the effects of the Fed’s aggressive tightening campaign become apparent.

The US economy expanded faster than anticipated in the fourth quarter, but this likely overstates the economy’s strength. A measure of domestic demand grew at the slowest rate in 2-1/2 years due to higher borrowing prices.

Initial claims for state unemployment benefits decreased by 6,000 to a seasonally adjusted 186,000 for the week ended January 21, the lowest level since April 2022, according to a separate Labor Department report released on Thursday.

At its meeting on January 31–February 1, the Fed is expected to reduce rate hikes from 50 basis points (bps) in December to 25 bps.

Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, said: “The US economy isn’t plummeting off a cliff, but it is losing vigor and risks contracting early this year.” That should restrict future rate hikes by the Fed to two modest increases.

Investors are now waiting for the personal consumption expenditures (PCE) data from the United States, the Fed’s favored inflation gauge, to be released at 1330 GMT.

According to IG Market strategist Yeap Jun Rong, a negative surprise in the data may indicate a less aggressive Fed, which might ultimately lead to higher gold prices over time.

Bullion typically benefits from lower interest rates since they reduce the opportunity cost of owning the non-yielding asset.