Gold Sinks, Weighed Down by the Dollar and US Yields Post CPI

Gold (XAU/USD) Analysis

Hot January CPI Lifts the Dollar and US Yields but PCE Inflation is Key

After US CPI beat expectations yesterday, both the US dollar and Treasury yields rose. The lift was the latest move within a general trend higher for both asset classes as market participants ease expectations around rate cuts materializing in March and May – now seeing June as the most realistic date for a first cut.

US data has consistently beaten expectations for a number of economic indicators, advancing the concern that cutting rates too soon may spur on inflation again. Recent NFP data provided an upside revision to the December jobs number with January’s figure posting a sizeable upward surprise. Q4 GDP, likewise, revealed the US economy is moderating but still seeing strong growth as the final quarter of 2023 grew 3.3% from Q3, much better than the conservative 2% reading anticipated. As long as the economy shows signs of resilience, markets and the Fed are likely to adopt a cautious approach to easing financial conditions.

US Dollar Basket vs US 2-Year Yield (blue)

Source: TradingView, prepared by Richard Snow

While the market places a lot of attention on the CPI reading of inflation, the Fed targets the PCE measure at 2%. Therefore, considering PCE is at 2.6%, the Fed will consider hotter CPI readings but ultimately looks to PCE as their inflation gauge.

Powell confirmed that the Fed will look to adjust interest rates ahead of reaching the 2% target meaning in the absence of any external shocks which are likely to reignite inflation pressures, the Fed may actually be closer to a rate cut than many think.

Source: Refinitiv, prepared by Richard Snow

Gold Sinks, Weighed Down by the Dollar and Yields Post CPI

Gold prices had already flirted with a breakdown of the triangle pattern, testing and closing below support. The catalyst that was CPI, then sent the gold price sharply lower in response to the higher dollar and US yields. A higher dollar raises the price of gold for foreign purchasers and higher treasury yields makes the non-interest-bearing metal less appealing.

The nearest level of support appears at $1985 – a level that previously acted as resistance during the consolidation of June last year. The big test for bears will be the 200-day simple moving average which sits around $1984. Resistance lies at $2010 if we are to see a pullback of the recent move but momentum still leans in favour of a move to the downside.

Gold (XAU/USD) Daily Chart

Source: TradingView, prepared by Richard Snow

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX