A rising disinflationary environment provides the Federal Reserve room to ease its monetary policy within the first quarter of this year; however, solid economic activity does not give the central bank any incentive to act.
This uncertainty has a firm grip on the gold market as prices consolidate within a narrow range, holding critical support above $2,000 an ounce. Gold prices are looking to end their second week in negative territory. February gold futures last traded at $2,015.80 an ounce, down 0.7% from last week.
According to some analysts, new momentum in the gold market hinges on the Federal Reserve’s monetary policy as markets see a 50/50 chance of a rate cut coming as soon as March.
“With the U.S. growth outlook improving, the FOMC is in no hurry. With that in mind, the current number of projected rate cuts can not go any higher until the cat is out of the bag (cuts begin) or economic data suddenly takes a turn for the worse,” said Ole Hansen, head of commodity strategy at Saxo Bank.
Although gold is capped on the upside as the U.S. central bank drags its feet on potential rate cuts, Hansen added that the fact that rates will be coming down this year creates limited selling pressure.
Friday’s economic data highlights the volatility and uncertainty in the economy. The U.S. Department of Commerce said its core Personal Consumption Expenditures price index in the last 12 months rose 2.9%, its lowest pace since February 2021. The Federal Reserve’s preferred inflation gauge has been running at an annualized pace in line with its 2% target for seven months now.
At the same time, the report also noted that personal consumption rose 0.7% in December, following a 0.4% increase in November.
Looking to Wednesday’s monetary policy meeting, analysts have said that it is unlikely the Federal Reserve will strike an overly dovish tone next week as it makes its first decision of 2024.
“The anticipation of potential central bank rate cuts later this year, alongside recent US dollar weakening, is fuelling optimism that gold markets will advance further and sustain gains much higher than its current price just above US$2,000 per troy ounce. If [Federal Reserve Chair] Jerome Powell indicates that rate cuts could take place sooner rather than later this year, gold markets could breakout higher on this signal. That said, tougher language on keeping rates elevated for longer could present downside risks to the yellow metal in trading following the committee meeting,” said Stuart O’Reilly, Market Insight Analyst at The Royal Mint.
“Bigger picture, geopolitical volatility and recent economic uncertainty are creating elevated demand for precious metals as more investors move into ‘safe-haven’ assets. Gold and other precious metals are increasingly becoming a mainstream choice for investors who are looking to diversify their portfolio and hedge against inflation,” O’Reilly added.
With the Federal Reserve keeping its cards close to its chest, gold investors will have to pay more attention to the data
“It will be more important to watch Friday’s employment numbers than listen to what the Fed has to say,” said Philip Streible, chief market strategist at Blue Line Futures. “We know the Fed is paying attention to the labor market; any weakness will force their hand to cut rates. Investors also need to look past government-created jobs and look at the condition of the real job market.”
Along with the U.S. monetary policy meeting, next week will also feature critical labor market data, including forward-looking job opening data, private sector employment and wage data, with Friday’s nonfarm payrolls capping the week.
Meanwhile, the Bank of England will also hold its first monetary policy meeting of the year. The BoE is even in a more difficult position as the British economy slows and inflation remains stubbornly high.
This uncertainty has a firm grip on the gold market as prices consolidate within a narrow range, holding critical support above $2,000 an ounce. Gold prices are looking to end their second week in negative territory. February gold futures last traded at $2,015.80 an ounce, down 0.7% from last week.
According to some analysts, new momentum in the gold market hinges on the Federal Reserve’s monetary policy as markets see a 50/50 chance of a rate cut coming as soon as March.
“With the U.S. growth outlook improving, the FOMC is in no hurry. With that in mind, the current number of projected rate cuts can not go any higher until the cat is out of the bag (cuts begin) or economic data suddenly takes a turn for the worse,” said Ole Hansen, head of commodity strategy at Saxo Bank.
Although gold is capped on the upside as the U.S. central bank drags its feet on potential rate cuts, Hansen added that the fact that rates will be coming down this year creates limited selling pressure.
Friday’s economic data highlights the volatility and uncertainty in the economy. The U.S. Department of Commerce said its core Personal Consumption Expenditures price index in the last 12 months rose 2.9%, its lowest pace since February 2021. The Federal Reserve’s preferred inflation gauge has been running at an annualized pace in line with its 2% target for seven months now.
At the same time, the report also noted that personal consumption rose 0.7% in December, following a 0.4% increase in November.
Looking to Wednesday’s monetary policy meeting, analysts have said that it is unlikely the Federal Reserve will strike an overly dovish tone next week as it makes its first decision of 2024.
“The anticipation of potential central bank rate cuts later this year, alongside recent US dollar weakening, is fuelling optimism that gold markets will advance further and sustain gains much higher than its current price just above US$2,000 per troy ounce. If [Federal Reserve Chair] Jerome Powell indicates that rate cuts could take place sooner rather than later this year, gold markets could breakout higher on this signal. That said, tougher language on keeping rates elevated for longer could present downside risks to the yellow metal in trading following the committee meeting,” said Stuart O’Reilly, Market Insight Analyst at The Royal Mint.
“Bigger picture, geopolitical volatility and recent economic uncertainty are creating elevated demand for precious metals as more investors move into ‘safe-haven’ assets. Gold and other precious metals are increasingly becoming a mainstream choice for investors who are looking to diversify their portfolio and hedge against inflation,” O’Reilly added.
With the Federal Reserve keeping its cards close to its chest, gold investors will have to pay more attention to the data
“It will be more important to watch Friday’s employment numbers than listen to what the Fed has to say,” said Philip Streible, chief market strategist at Blue Line Futures. “We know the Fed is paying attention to the labor market; any weakness will force their hand to cut rates. Investors also need to look past government-created jobs and look at the condition of the real job market.”
Along with the U.S. monetary policy meeting, next week will also feature critical labor market data, including forward-looking job opening data, private sector employment and wage data, with Friday’s nonfarm payrolls capping the week.
Meanwhile, the Bank of England will also hold its first monetary policy meeting of the year. The BoE is even in a more difficult position as the British economy slows and inflation remains stubbornly high.
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