Gold Price Forecast XAU/USD – Edging into 8-Month High on Lower Fed Rate Hike Expectations

Gold futures are higher on Wednesday after touching a new eight-month peak earlier in the session. The move represents a fourth-straight day of gains as expectations of slower U.S. rate hikes pressured Treasury yields.

Bullion may be higher but the buying is a little tentative ahead of Thursday’s U.S. consumer inflation report with Treasury yields dipping and the U.S. Dollar firming. In order to really give gold prices a boost, it would be nice if both were on the decline.

At 11:34 GMT, February Comex gold futures are trading $1888.00, up $11.50 or +0.61%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $174.73, up $0.63 or +0.36%.

Treasury Yields Fall as Traders Look Ahead to Key Economic Data

U.S. Treasury yields are edging lower on Wednesday as investors looked to key economic data releases due later this week that could provide clarity on the state of the U.S. economy as well as influence the size of future interest rate hikes at the Federal Reserve’s policy meeting on Jan. 31 – Feb. 1.

Falling Treasury yields tend to have a bullish effect on gold because they lower the opportunity cost of holding non-yielding bullion.

Dollar Holds Firm Ahead of U.S. Inflation Data

The U.S. Dollar held its ground on Wednesday as traders waited for this week’s U.S. consumer price data to see whether it will confirm that inflation is in retreat.

Short-Term Outlook

The recent price action in the financial markets and especially gold indicates that Thursday’s CPI report is likely to be a game-changer. In other words, this report could control the direction of gold for several week or even months.

On Tuesday, Fed Chair Powell said nothing about Fed policy during a panel discussion in Stockholm on Tuesday. However, on Monday, two key Federal officials did emphasize that their next moves will be data-dependent – meaning Thursday’s CPI report will set the tone.

Essentially, another dip in Core CPI would solidify the deceleration in price pressures. Treasury yields would fall on the news and the U.S. Dollar would ease further. This would encourage the Fed to shift pricing for the Fed’s February meeting from a 50 basis point increase to a 25 basis point increase.

More importantly, it could encourage some Fed members to lower their forecast for the terminal or end rate from 5.0%-5.50% to 4.75%-4.50%. This move could spike gold prices higher.