Gold Price Forecast XAU/USD – Traders Cautious Ahead of US Inflation Data, Fed Rate Decision

Gold futures are inching higher early Tuesday, underpinned by a softer U.S. Dollar and a dip in U.S. Treasury yields. The tight trading range and below average volume suggests a nervous tone ahead of today’s U.S. inflation data and tomorrow’s Federal Reserve policy decision.

At 06:27 GMT, February Comex gold is trading $1796.50, up $4.20 or +0.23%. On Tuesday, the SPDR Gold Shares ETF (GLD) settled at $165.68, down $1.38 or -0.83%.

Consumer Price Index to Set the Tone on Tuesday

Consumer inflation likely cooled in November, but prices continued to rise at a still high rate, particularly for services.

Economists expect the consumer price index rose by 0.3% in November, or at an annual pace of 7.3%, according to Dow Jones. That’s down from 7.7% in October. When excluding food and energy, core CPI was expected to climb by 0.3%, or 6.1% year-over-year, compared with October’s 0.3% gain, or an annual rate of 6.3%, according to Dow Jones.

Yields Drift Lower, Dollar Slightly Weakens Ahead of CPI Report, Fed Meeting

U.S. Treasury yields dipped on Tuesday as investors awaited the start of the Federal Reserve’s December meeting and consumer inflation figures due to be released at 13:30 GMT.

The Fed is expected to start its last meeting of the year on Tuesday. Investors widely expecting officials to increase interest rates by 50 basis points, marginally slowing down the pace of rate hikes after four consecutive 75 basis point increases.

Market projections for the peak in U.S. interest rates have also slipped, with futures pricing indicating the Fed funds rate – currently set between 3.75% and 4% – staying below 5%.

Investors are also hoping that Fed Chairman Jerome Powell will provide further guidance about future monetary policy in his remarks at the end of the meeting.

Short-Term Outlook

In my opinion, if the CPI meets expectations then that will be good for gold prices. If the theme of cooler inflation holds, then bond yields will likely fall, dragging the U.S. Dollar with them. Lower yields make non-yielding gold more attractive to investors. A weaker greenback tends to drive up foreign demand for dollar-denominated bullion.

A surprise to the upside is likely to lead to heightened volatility in the financial markets. It should also lead to a more sizeable market response to the downside in gold. Additionally, traders will also begin questioning whether inflation has actually peaked.

A hotter or lower CPI report is not likely to sway the Fed at Wednesday’s meeting, but it could affect the longer-term trajectory for interest rates.