XAU/USD Retreats from All-Time Highs as US Inflation Remains Elevated

After reaching unprecedented levels, the price of gold experienced a slight decline, coinciding with an uptick in US Treasury bond yields. Analysis of short-term technical indicators suggests that the XAU/USD pair remains in an overbought condition. Market focus is now on the upcoming Federal Reserve policy announcement and the release of the dot plot projections scheduled for next week.

Gold Prices Dip as US Yields Rebound on Positive Economic Data

At the start of the week, markets moved sluggishly, causing gold to struggle for momentum and close with modest gains on Monday. On Tuesday, the Bureau of Labor Statistics reported a slight uptick in annual US inflation to 3.2% in February from 3.1% in January, with both the Consumer Price Index (CPI) and Core CPI rising 0.4% monthly. The rise in the benchmark 10-year US Treasury bond yield by more than 1% prompted XAU/USD to break a nine-day winning streak, losing over 1% for the day.
With no significant data releases on Wednesday, gold entered a consolidation phase, partially recovering from Tuesday’s losses. Thursday saw the Producer Price Index (PPI) climb 1.6% in February, surpassing expectations, while US Retail Sales increased by 0.6% monthly in February. The number of first-time jobless claims also dipped slightly.

These data releases prompted investors to reassess the timing of a potential Federal Reserve policy pivot, with the probability of the Fed leaving the policy rate unchanged in June increasing to 40%. The 10-year US yield rose to its highest level in two weeks at 4.3%, exerting downward pressure on gold, which fell below $2,160.

As the 10-year yield corrected downward early Friday, gold regained some ground, reaching the $2,170 level. However, XAU/USD retraced its rebound later in the session, ending the week in negative territory.

The Federal Reserve is set to unveil its monetary policy decisions and updated Summary of Economic Projections (SEP), known as the dot plot, on Wednesday. Market expectations lean towards no changes in policy settings.

Gold Awaits Dovish Fed Move to Aim for New All-Time High

In December, the dot plot indicated Fed policymakers anticipated a total of 75 basis points (bps) in rate cuts for 2024. Market data suggests a 70% chance of at least a 75 bps rate reduction after December’s meeting.

Should the SEP reveal a shift towards 50 bps rate cuts for the year, initial market reactions may strengthen the USD. Unchanged or upwardly revised inflation forecasts for 2024, despite a move towards 50 bps cuts, could further boost the USD.

Conversely, if policymakers still favor a total of 75 bps cuts for 2024, or if inflation forecasts are downwardly revised, the USD could weaken. A decline in the 10-year US yield could also drive XAU/USD higher.

Attention will then turn to Fed Chair Jerome Powell’s post-meeting press conference. While a rate cut in May is unlikely, uncertainty remains for June. A cautious tone from Powell regarding inflation and a lack of signals for a June rate cut may pressure XAU/USD.

Additionally, the Bank of Japan and Bank of England will announce their policy decisions. While these may not directly impact gold, they could influence XAU/USD by affecting USD demand. Speculation suggests the BoJ may end its negative interest rate policy, potentially leading to USD outflows and aiding XAU/USD’s rise.

The BoE’s Thursday announcement, following the Fed event, could affect XAU/USD if it diverges from the Fed’s hawkish stance. A cautious BoE tone paired with a hawkish Fed may strengthen the USD but could also drive capital flows into gold, particularly if it contrasts with the BoE’s stance.

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