Gold Prices Forecast: Rate Cut Hopes Diminish Amid Inflation Concerns

US Inflation Data Impact Gold

Gold prices steadied on Wednesday following a significant drop, influenced by persistent U.S. inflation and expectations regarding Federal Reserve interest rate decisions. The 1.1% decline in gold prices on Tuesday was the largest since February 13, coinciding with higher-than-anticipated U.S. consumer price data for January.

At 10:57 GMT, XAU/USD is trading $1923.23, up $3.065 or +0.16%

Interest Rate Cut Expectations Adjust

With the latest inflation figures surpassing forecasts, traders have slightly reduced their expectations for a June interest rate cut. The likelihood, as per LSEG’s app, fell from 72% to 67%. Similarly, the CME Group’s FedWatch tool shows a 65% chance of a rate cut in June. This cautious approach reflects the market’s response to the Federal Reserve’s signals on future rate adjustments.

Inflation and Federal Reserve’s Stance

Despite inflation easing from its 2022 highs, it remains above the Federal Reserve’s 2% target. The Fed’s decision-making hinges on these inflation trends, with few clues about the timeline for rate cuts. Fed Chairman Jerome Powell’s recent comments suggest the first cut might not be far off. The upcoming producer price index will offer further insight into inflationary trends.

Market Reactions and Dollar Stability

The U.S. dollar index maintained stability as the market processed the inflation data, with expectations of a Fed rate cut in June still strong. The Treasury yields and the dollar saw an increase, partly driven by a weak demand at a Treasury note auction. Meanwhile, geopolitical tensions, particularly concerning Russia and Ukraine, also influence market trends.

Short-Term Market Forecast: Bearish

Considering the current economic indicators and market reactions, a bearish short-term forecast for gold prices is plausible. The combination of steady dollar performance, higher Treasury yields, and cautious investor sentiment due to inflation data and geopolitical concerns, suggests a potential further decline in gold prices in the near term.

Technical Analysis

The trend is up in gold (XAU/USD) although the market looks vulnerable to a near-term correction.

Given the February 14 main bottom at $1984.305 and the March 8 main top at $2195.235, the most likely downside target is its 50% to 61.8% retracement zone at $2089.77 to $2064.88, followed by the 50-day moving average at $2049.26.

A trade through $2195.235 will signal a resumption of the uptrend, but will there be enough buyers on this move to extend the rally? Or will it turn out to be a bull trap?

We’re likely looking at a period of extreme volatility with aggressive counter-trend traders looking to short and passive investors waiting to re-enter on a pullback into the support zone.