Gold rises as a result of dollar weakness and market participants actively buying

Gold futures basis, the most active April contract (GC J24) gained $9.10 or 0.45% as of 4:40 PM ET. Dollar weakness contributed approximately half of today’s gains, with the dollar index (USDX) declining by 0.24%, with the remaining 0.20% directly attributable to investors bidding the precious yellow metal higher. Exchange volume was rather subdued today, with daily volume falling well below the monthly average. 

Federal Reserve officials will be exceedingly busy, with eight members scheduled to speak this week. Additionally, next week, the government will release its latest inflationary data vis-à-vis the CPI report for January. Expectations are that the inflation report will result in bullish market sentiment, as economists are looking for a softening in inflationary pressures. This would be a distinct difference from last week’s jobs report, which decreased the optimism of a rate cut in March.

Market participants are eagerly awaiting information regarding the timing of a pivot by the Federal Reserve from rate hikes to rate cuts. The overwhelming consensus by analysts that will be expecting the Fed to continue the narrative that a rate cut in March is unlikely to occur. According to the statements by multiple Federal Reserve officials, including Chairman Powell, Fed members are hoping for more information reinforcing that inflation continues to move in the intended direction and is well on the path to the Fed’s 2% target.

The probability of a rate cut in March is only 19.5% according to the CME’s FedWatch tool. The probability increases dramaticallyin May, with a high likelihood of the Fed initiating its first rate cut. Currently, there is a 53.2% probability that the Fed will implement a ¼% rate cut and a 10.8% probability that the Fed will be more aggressive in cutting rates by a ½%. This leaves only a 36.1% probability that the Fed will maintain its current level of 5 ¼% to 5 ½% in May.

The Federal Reserve is still immensely focused on the fallout from declines in commercial real estate. Chairman Powell expressed genuine concern with the assumption that issues with the commercial real estate market are just beginning to have a profound impact on banks.

Speaking with Scott Pelley during an interview with 60 Minutes on February 1, Chairman Powell was asked whether inflation was dead. The chairman responded by saying, “I wouldn't go quite so far as that. What I can say is that inflation has come down really over the past year, and fairly sharply over the past six months. We're making good progress. The job is not done and we're very much committed to making sure that we fully restore price stability for the benefit of the public.”

When questioned why the Federal Reserve has not already cut rates, Chairman Powell addressed multiple factors such as the strong economy with growth at a solid pace, a labor market with only 3.7% employment which the chairman believes that they can have the latitude to wait and reduce rates carefully and slowly. 

“We want to see more evidence that inflation is moving sustainably down to 2%. We have some confidence in that. Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.”

When pressed as to when the Fed will implement its first rate cut Powell continues his narrative on data dependency, “the best we can do is to weigh the risk of moving too soon against the risk of moving too late and make that judgment in real time.”

The chairman expressed the danger of moving too soon and expressed that the most prudent thing to do is to give it some time and “see that the data continues to confirm that inflation is moving down to 2% in a sustainable way”.

Wishing you as always good trading,