Gold Steadies as Markets Await Inflation Data, Fed's Next Move

Gold futures regained some stability on Tuesday, trading down just 0.23% after a sharp $60 decline in the previous session. The April 2024 contract touched an intraday low of $2,304.60 before recovering to $2,335.57 as of 5 PM EDT.

Monday's sell-off was fueled by easing geopolitical tensions in the Middle East after Israel's retaliatory strikes against Iran did not escalate further conflict between the two nations. With fears of further military action between Israel and Iran dissipating, gold's safe-haven demand took a hit.

However, all eyes are now on the upcoming U.S. inflation report scheduled for this Friday. The Personal Consumption Expenditures (PCE) data, which is the Federal Reserve's preferred inflation gauge, could shape expectations for the central bank's next policy move.

According to experts surveyed by Dow Jones Newswires and The Wall Street Journal, the core PCE index, excluding volatile food and energy prices, is expected to moderate slightly to an annual rate of 2.7% in March, down from 2.8% in February. However, the overall PCE index is projected to accelerate to 2.6%, up from 2.5% the previous month.

"Economists expect the Federal Reserve's preferred measure of inflation to remain stubborn in March," noted Investopedia. "The personal consumption expenditures index will likely follow its counterpart inflation measures, but the details could make the Federal Reserve's job of parsing data more difficult."

According to the Fed's projections in December 2023, and the March 2024 SEP (Summary of Economic Projections), officials were anticipating implementing three quarter-point rate cuts by the end of 2023, bringing the benchmark federal funds rate down to a range of 4.5% to 4.75%. 

Persistently elevated inflation readings so far in 2023 have made predictions challenging and could force the Fed to reconsider its current policy outlook. Initially expected to begin cutting interest rates as early as June, the central bank has pushed back those expectations amid sticky price pressures.

"Fed officials have said they need more confidence that inflation is under control before the central bank will cut rates," Investopedia noted.

For gold investors, the Fed's policy trajectory is crucial. A slower-than-expected pace of rate cuts could dampen bullish momentum in the precious metal, as higher interest rates increase the opportunity cost of holding non-yielding assets like gold. Conversely, a more aggressive easing cycle would likely provide tailwinds for gold prices.

As markets await Friday's PCE data, the trajectory of inflation and the Fed's response to it will continue to drive volatility in the gold market.

Wishing you as always good trading,