Gold investors wait for Thursday’s inflation report and Friday’s PPI report

Market participants are focusing on tomorrow’s latest data on inflation, which will be followed by the PPI (Producer Price Index) report on Friday. Economists are forecasting that headline inflation has increased and projected a rise of 0.2% in December, which would take inflation year-over-year from 3% to 3.2%. Although the Federal Reserve’s preferred measure is core inflation, headline inflation is a primary focus of consumers as it also looks at increases in food and energy prices.

This could weigh heavily on the Federal Reserve’s announcement of upcoming rate cuts this year. According to the Fed’s “dot plot” as well as Chairman Powell’s press conference after the December FOMC meeting, the Federal Reserve intends to cut rates by three-quarters of a percent this year.

It seems that traders of Fed funds futures could be overly optimistic because they are speculating that the Federal Reserve will begin its pivot from rate hikes to rate cuts in March. More importantly, it is widely believed by Fed fund futures traders that the initial rate cut will be followed by four to five additional rate cuts this year. If true, this would take the Fed’s benchmark overnight borrowing rate to between 3 ¾% to 4% by the end of this year. This is according to the CME’s FedWatch tool.

The overwhelmingly optimistic outlook by Fed funds traders and the investment community could easily be stifled if inflationary data tomorrow and Friday's PPI report do not indicate progress in the Federal Reserve’s fight against inflation.

As such, market participants could expect to see increased volatility if the dynamics of the Federal Reserve’s monetary policy does not match the data. However, at least for today, trading in the precious metals and U.S. equities is muted as investors and traders await the release of tomorrow’s CPI inflation index, and Friday's Producer Price Index.

As of 3:50 PM ET gold futures basis the most active February contract is trading lower by $5.40 and currently fixed at $2027.50. The dollar is fractionally lower down 0.08% and continues to be range bound with the dollar index fixed at 102.432.

Wishing you as always good trading,