Gold Dynamics Amidst Dollar Strength and Inflation Uncertainty
The XAU/USD pair is demonstrating an upward trend during Wednesday's trading session and is trading at the level of $2035. Gold is attempting to recover positions after a decline at the end of last week, during which the asset set a local minimum since December 13 at $2016 per ounce.
It is worth noting that the rise in gold is limited by the ongoing strengthening of the dollar, which is supported by the increase in yields on US Treasury bonds and is trading in close proximity to a three-week peak set last Friday. In particular, the yield on 10-year government bonds remains above 4%, reflecting a reduced likelihood of the Federal Reserve's (Fed) imminent monetary policy easing.
At the same time, market activity remains low as traders prefer not to rush into opening new positions ahead of the release of inflation data in the United States. The CPI report will be published tomorrow and may provide some hints about the Fed's future actions amid uncertainty about the timing of the first interest rate cut. According to forecasts, in December, the US Consumer Price Index (CPI) increased from 3.1% to 3.2% on an annual basis, while the core indicator, excluding food and energy, decreased from 4% to 3.8%.
If analysts' expectations are confirmed, and the US records a new multi-year low in the core inflation rate, traders may need to revise their forecasts for the timing of the first rate cut. It is quite possible that low Consumer Price Index values will lead traders to speculate that the US regulator will still ease monetary policy by the end of the first quarter of 2024. In such a scenario, pressure on the dollar and Treasury yields may intensify, and considering that gold has an inverse correlation with them, buyers of precious metals may re-enter the market.
Additionally, announcements of monetary policy easing by the European Central Bank (ECB), the People's Bank of China, and several other regulators may make gold more attractive to investors, given the ongoing geopolitical tensions in the world. Taking all this into account, the XAU/USD pair may conclude the week around $2050 per ounce.
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