Gold Prices Recover as Market Reassesses Fed Rate Cut Expectations
Gold prices experienced a slight increase in Asian trade on Tuesday, bouncing back from a challenging start to the year. This recovery comes as markets reassess expectations for early interest rate cuts by the Federal Reserve. The yellow metal saw a sharp decline below the $2,050 an ounce level last week, following strong labor market data that generated uncertainty about the Fed’s plans to loosen policy early. However, gold prices found some relief this week as the dollar dropped from three-week highs, prompting some profit-taking. Despite this, gold prices remained significantly below December’s highs.
US Inflation Data Awaited for Rate-Cut Cues
Traders have a strong bias towards the dollar as they wait for key data due on Thursday. This data is expected to reveal a mild increase in inflation in December, giving the Federal Reserve more leeway to maintain higher interest rates for a longer duration. This led to a reduction in expectations for early rate cuts, causing gold to lose some of the gains it made in December. Although gold ended 2023 with a 10% gain, Fed officials continue to push back against expectations for early rate cuts. Atlanta Fed President Ralph Bostic, for example, remains biased towards tight policy in the near term due to inflation being well above the Fed’s 2% annual target.
Fed Officials Push Back Against Expectations for Rate Cuts
Despite expectations for rate cuts in the future, Fed officials are pushing back against the idea of early cuts. Ralph Bostic from the Atlanta Fed mentioned that although rates are expected to eventually fall in 2024, he believes they will only decrease by around 50 basis points, which is smaller than what the market anticipates. This sentiment is causing traders to trim bets on the Federal Reserve cutting rates as early as March. The futures market now shows a 59.4% chance of a March cut, down from 64% on Monday and 70.7% a week ago. Higher interest rates for an extended period of time are unfavorable for gold as they increase the opportunity cost of investing in the yellow metal, which offers no yield.
Traders Trim Bets on March Rate Cut, Pressuring Gold
As expectations for a rate cut in March diminish, traders are scaling back their bets, thereby putting pressure on gold prices. The reduction in expectations is driven by the economic data due this week and the pushback from Fed officials against early rate cuts. With less certainty around rate cuts, gold prices are unable to maintain the gains they made in December.
Copper Prices Tread Water Amid Dollar Pressure, China Anticipation
Copper prices remained relatively stable on Tuesday, facing pressure from a strong dollar. Additionally, traders are cautiously awaiting key economic readings from China, the world’s top copper importer. The US data due this week is not the only focus for traders, as Chinese trade figures for December are also anticipated on Friday. Despite overall economic weakness, China’s copper imports were surprisingly resilient throughout 2023. The upcoming data will provide insight into whether this trend continued in December.
Analyst comment
Positive news: Gold prices recover as market reassesses Fed rate cut expectations.
Analyst’s prediction: The market expects gold prices to stabilize or continue to recover as traders trim bets on an early rate cut by the Federal Reserve in March, reducing uncertainty and boosting investor confidence.
