Gold Price Outlook- US Inflation Data Set To Influence XAU/USD Direction

Forex

Summary:

Gold prices have been directionless this year, caught in a consolidation phase as they await new catalysts. Upcoming US inflation data could impact gold prices. This analysis explores crucial XAU/USD price levels to watch.

Gold (XAU/USD) has lacked directional conviction since the beginning of 2024, with prices oscillating between technical resistance at ~$2,065 and horizontal support at ~$2,005. Although bullion's prospects seemed more positive a month ago, the bullish thesis appears to be on hold for now, especially after the Federal Reserve indicated that it is in no hurry to start lowering borrowing costs.

If rates remain at elevated levels or even rise further, precious metals, which do not pay dividends or offer yields, will struggle to follow an upward trajectory. With the interest rate outlook front and center these days, the FOMC's monetary policy path will perhaps be the most important catalyst driving market dynamics in the near term.

US central bank's rate strategy awaits CPI report: impact on gold prices

Burned by false dawns before and fearful of complicating efforts to restore price stability, the US central bank has resisted pressure to start cutting rates imminently. This pushback could be validated if the upcoming consumer price index report, due for release next week, reveals limited progress towards disinflation.

In terms of Wall Street projections, January headline CPI is forecast to have moderated to 3.1% yoy from 3.4% yoy in December. In contrast, the core gauge—a measure of long-term and underlying price trends in the economy—is seen cooling in a more gradual fashion, easing only to 3.8% yoy from 3.9% yoy previously.

Focusing on potential outcomes, any upside surprise in the official CPI numbers relative to consensus estimates, particularly in the core metrics, should be bearish for gold. This scenario is likely to induce traders to scale back dovish interest rate expectations, which currently envisage 110 basis points of easing through year's end, boosting yields and the US dollar in the process.

Fed funds futures contracts – implied yields

Meanwhile, lower-than-forecast inflation readings should be positive for the yellow metal. A large enough miss could even motivate markets to increase bets that the first rate-cut will come at the March meeting. In this case, US treasury yields, along with the US dollar, may head lower while risk assets could experience a favorable turn.

Gold price technical analysis

Gold prices (XAU/USD) were somewhat subdued on Wednesday, moving aimlessly and consolidating around the 50-day simple moving average at $2,035, perhaps in search of fresh market catalysts. The ongoing consolidation phase is not likely to end until prices either clear resistance at $2,065 or take out support at $2,005 decisively.

In the event of a resistance breakout, the focus will be squarely on $2,085. From there, further gains may lead to renewed interest in the all-time high in the vicinity of $2,150. Meanwhile, a breach of support could spark a pullback towards $1,990. Additional losses past this threshold could bring attention to the 200-day simple moving average near $1,995.

Gold price (XAU/USD) technical chart

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Remarks of Officials

Bank of England (BOE) Deputy Governor Sarah Breeden said in a speech on February 1, local time, as follows.

The decline in inflation is due to various reasons such as lower crude oil prices, as well as falling core goods and services inflation, suggesting that inflation is moving in the right direction.

Although higher interest rates have curbed inflation, the fall in inflation can largely be accounted for by a fading of global inflationary shocks (energy and food prices). Easing input cost pressures have weighed on core consumer goods inflation and are indeed expected to continue to do so in the near term. We have seen a similar trend in services price inflation, albeit to a much lesser extent so far, where, despite recent downside news, inflation remains above 6%. Some combination of moderation in pay pressures and firms' margins will be required for services inflation to return to more normal rates.

The next few months will be incredibly important for my assessment of wage and price persistence. Many of the wage settlements set to take effect over the next few months may even have already been decided. But how these feed through to inflation will depend heavily on the economic environment in which they are made.

There is considerable uncertainty around the strength of the monetary transmission mechanism. But, as time has progressed, we have seen more of the transmission occur. The resilience in the housing market may prove to be a signal that demand is stronger than we expect. Downside risks to demand are less likely to materialize beyond expectations.

Declining services inflation and slowing wage growth reduced my concerns about the risk of even greater persistence of inflation. But we still have work to do and some way to go. I need to see further evidence to be confident that the UK economy is progressing as set out in our forecast. Monitoring wage growth and how firms pass these onto prices over the next few months will be vital

With the likelihood of a sustained fall in inflation increasing, I no longer see the need to tighten monetary policy further. The Monetary Policy Committee's focus has shifted to how long interest rates need to stay at current levels.

Speech by Breeden

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Ukadike Micheal

Stocks

Economic

On Thursday, Hong Kong's Hang Seng index faced a notable 1.4% decline on the final trading day before the lunar new year break. This downturn was led by Alibaba, a key constituent, witnessing a significant sell-off following disappointing earnings, with the company's Hong Kong shares plummeting by 6.6%.

Alibaba's disappointing financial results, despite announcing a substantial share buyback, were attributed to underwhelming revenue from its once-dominant domestic ecommerce business. Fierce competition from Pinduoduo and Douyin added pressure, contributing to the sell-off.

Meanwhile, China's CSI 300 index managed to rise by 0.7%, indicating a different market sentiment compared to Hong Kong. Japan's Topix also experienced a 0.5% increase, and South Korea's Kospi saw a gain of 0.4% on the same day.

The divergence in market performance between Hong Kong and its Asian counterparts underscores the impact of company-specific issues, such as Alibaba's struggles, on regional indices. The sell-off in Alibaba, a major player in the global tech landscape, not only affected the Hang Seng index but also sent ripples through investor sentiment.

From a technical viewpoint, the sharp sell-off in Alibaba's shares raises concerns about the broader market's vulnerability to company-specific shocks. Investors and analysts will closely monitor how Alibaba navigates the challenges posed by increased competition in the domestic ecommerce sector. Additionally, the broader implications of this decline on investor confidence in the Chinese tech industry will be a focal point in the coming weeks.

As Hong Kong enters the lunar new year break on a subdued note, the market's response to Alibaba's disappointing earnings will likely linger. The contrasting performances of regional indices highlight the nuanced nature of Asian markets, where individual company dynamics can have a significant impact on broader market trends.

The final trading day before the lunar new year break witnessed a notable decline in Hong Kong's benchmark index, driven by Alibaba's disappointing earnings and the resulting sell-off. This event not only reflects challenges within the specific company but also raises broader questions about the resilience of regional markets. As investors await the resumption of trading post-holiday, the fallout from Alibaba's struggles will likely continue to shape market sentiment and influence investment decisions in the evolving landscape of Asian equities.

Source: Reuters

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Commodity

These days, because investors have so many different assets to buy in so many different financial markets, it can be easy to miss an important trend or change in trend. Indeed, that seems to be the case with crude oil, where the long stagnation in U.S. output after the COVID-19 pandemic has suddenly turned into a new surge. In fact, U.S. oil production has recently reached a new record high.

As shown in the chart below, U.S. field production has fluctuated quite a bit over the last century. From 1920 to 1970, output grew approximately 4.2% per year, reaching 9.6 million barrels per day (bpd). However, output then fell and plateaued, despite the incentives to produce during the period’s high prices. Beginning in about 1985, production began what appeared to be an inexorable decline in the face of public policy and the limits of the available technology. To many people’s surprise, output suddenly reversed and started growing rapidly again during the Great Financial Crisis of 2008-2009, driven by new technologies such as hydraulic fracturingand horizontal drilling that opened up previously untappable shale formations. U.S. production jumped at an annual rate of 8.7% from 2009 to 2019, reaching almost 13.0 million bpd.

Obviously, the pandemic was a shock to the global economy. With the collapse in demand, oil prices actually turned negative for a short time in early 2020. More importantly, U.S. output fell sharply and appeared to stagnate. Much of the stagnation reflected reduced investment in new exploration and development as investors demanded better capital discipline and a stronger focus on profitability after the many bankruptcies of shale drillers during the period of 2009-2019. Stronger environmental regulations, which aimed to shift the economy away from fossil fuels, also discouraged drilling. Many investors began to question whether the industry could ever grow again.

In mid-2023, U.S. oil output began to accelerate in earnest, likely reflecting the incentive of high energy prices at the time and an unexpected second wind from technology improvements. Press reports say fracking and other shale technologies as well as operating approaches have simply improved more than expected. In any case, U.S. oil output has now reached 13.3 million bpd.

For the global economy, booming U.S. oil output doesn’t just mean that the country has become the world’s largest producer (which it has). As shown in the chart below, it also means that the U.S. has been able to significantly scale back its imports of foreign oil. U.S. Oil Production at a Record High_2

Surging U.S. oil production has altered global pricing dynamics. For example, before the shale boom, U.S. domestic oil prices (represented by the West Texas Intermediate) were typically slightly higher than foreign prices (represented by Brent Crude). For the last decade, however, the rich supply of domestic oil has held down U.S. prices. Reduced U.S. import demand and new laws allowing U.S. oil exports have also improved supplies for other countries. As shown in the following chart, Brent Crude now tends to trade several dollars higher than WTI. Nevertheless, the U.S. changes haven’t been enough to totally offset the fact that Saudi Arabia and its partners in OPEC and OPEC+ are withholding supplies in order to boost prices.

Going forward, the unexpected rebound of U.S. oil output and exports signifies that American production could help keep a lid on global prices for an extended period, even as the OPEC+ countries continue to withhold barrels. What could change the outlook? One key risk that we’re focused on is the possibility of a geopolitical crisis that disrupts supplies from a major foreign producer or exporter. If such a crisis occurs outside the Middle East, the availability of excess output capacity in Saudi Arabia and the rest of OPEC+ could potentially fill in the gap. If the crisis disrupts Middle Eastern supplies, however, the result would likely be a spike in global prices despite the renewed U.S. output boom and excess production capacity in the region.

Source：VettaFi

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Zi Cheng

Traders' Opinions

Economic

In January, consumer prices continued their downward trend for the fourth consecutive month, plummeting by 0.8% year-over-year, marking the most significant drop since 2009, as reported by the National Bureau of Statistics. Meanwhile, producer prices, which saw declines throughout the entirety of last year, also decreased in January as companies resorted to further price reductions to stimulate demand.

China's Deflation Continues To Fall Sharply_1

The ongoing decline in prices exacerbates China's array of economic challenges this year. Projections indicate a slowdown in growth compared to last year's lackluster performance. The prolonged downturn in the real estate sector is constraining consumer spending, with notable entities like China Evergrande Group facing liquidation orders from a Hong Kong court. Additionally, exports are struggling, and foreign investors are withdrawing from the market. In response to an extensive stock market downturn, Beijing replaced the country's top securities regulator on Wednesday.

The data released on Thursday reveal that deflation is proving to be more persistent than anticipated by many economists, heightening the risk of China slipping into a prolonged period of declining prices that becomes increasingly difficult to reverse with time.

Furthermore, this presents a unique challenge for the global economy. Weak consumer spending in China translates to reduced demand for exports from other countries, which could impede overall growth. While cheaper Chinese goods may alleviate inflation pressures elsewhere, they also signify a surge in low-cost imports as Chinese manufacturers seek buyers abroad for excess inventory. This influx of inexpensive imports threatens to squeeze domestic manufacturing in other countries, exacerbating already strained trade tensions between China and the Western nations led by the United States.

Eswar Prasad, a professor of trade policy and economics at Cornell University and former head of the International Monetary Fund's China division, commented that Thursday's price data, along with a series of other weak economic indicators, signal a challenging period ahead for the Chinese economy.

China has faced episodes of declining consumer prices in the past, notably during the Asian financial crisis of 1998 and the aftermath of the U.S. subprime mortgage collapse in 2009, which led to global bank bailouts.

If China's deflation continue to worsen, as China is one of the biggest economy in the world and the biggest economy in Asia, it could slow down Asia's economy affecting most of the countries in Asia.

Australia may face a significant challenge considering its status as the largest exporter of iron ore globally, with China serving as its primary customer. A potential economic deceleration in China is expected to translate into reduced demand for Australian resources.

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Stocks

As China Markets Flail, Rest of the World Is Roaring Ahead_1

Yet powered by the US tech euphoria, global equities are approaching records, haven assets are out of favor and even neighboring Asian markets are relatively unscathed. Chinese assets are out of sync with the rest of the world, with a measure of global financial market volatility trending lower this year.

It’s a stark contrast to what happened when China’s bubble burst in 2015 and the world’s two largest economies engaged in a trade war in 2018, which led to a synchronized drop in global shares. This time around Beijing’s woes remain an isolated affair after an exodus of international capital. As China Markets Flail, Rest of the World Is Roaring Ahead_2

As China Markets Flail, Rest of the World Is Roaring Ahead_2

With the selloff extending after three straight years of declines, even once-staunch China bulls including Goldman Sachs Group Inc. have been forced to rethink their views. If foreigners are not coming back, it will make Xi’s mission to engineer a market recovery more difficult to achieve. It’s also more fodder for investors looking to funnel capital to the pre-eminent US market and elsewhere in Asia instead.

“China seems to be divorced from the rest of the world,” said Steve Sosnick, chief strategist at Interactive Brokers. “Part of the lack of equity response is that the global economy is doing OK without China. The prior reactions occurred when China was a bastion of growth in a shakier world.”

The great divergence comes as onshore Chinese stocks have lost $4.8 trillion in value since their 2021 peaks, bogged down by a deepening property crisis, deflationary pressure and the state’s sweeping control over the private sector. That’s led to a record six months of outflows from mainland shares through January.

China’s economic gloom and technical triggers associated with snowball derivatives and margin calls have added to the selling pressure. The CSI 300 Index remains down 2% for the year despite this week’s more than 5% rebound. Beijing’s attempts to rescue markets with short-selling restrictions and state fund interventions may prove insufficient to reverse prevalent pessimism.

Meanwhile, confidence in an economic soft landing over in the US has pushed the S&P 500 to new highs. Elsewhere, a global artificial intelligence boom has supported tech-reliant markets like Taiwan while India — seen a China alternative with its huge consumer base — is powering ahead.

Beijing’s efforts to achieve self-sufficiency in key industries including tech has seen its economy somewhat disentangle from the rest of the world. The US has rolled out a series of sanctions aimed at containing its Asian rival’s technological prowess but the move has ironically also empowered some Chinese firms to develop their own edge.

With increased trade tensions prompting countries to diversify supply chains, a slowdown in the world’s no. 2 economy is having less of an impact. Underscoring a shift in global trade patterns, US imports from China dropped 20% in 2023 to trail those from Mexico for the first time in 20 years.

China is “trying to reduce reliance on foreign technology and prevent foreign investment in many industries in order to counter Western influence,” said Ellen Hazen, chief market strategist and portfolio manager at F.L .Putnam Investment Management. “Right now — between the demographic issue, the debt issue, the property issue, and the lack of clarity on what minority shareholders really own — we don’t think it’s quite cheap enough to justify a position for US dollar-based clients.”

All told, the monthly co-movement between China and global stocks is near historic lows, according to MSCI indexes. Back in August 2015, China’s devaluation of the yuan sparked a chain reaction across global markets, weighing on equities and commodities while giving bonds a boost. More than $5 trillion was wiped from the value of global stocks in two weeks.

Now, the falling correlation isn’t limited to stocks. The offshore yuan’s correlation with the Bloomberg Asia dollar spot index has fallen to 0.47 — with 1 indicating movements in tandem — from above 0.70 just four months ago. Using the same criteria, the link between China’s 10-year government bond yield and its Treasury equivalent is close to zero.

“The market is basically saying or acknowledging that some of the problems that China have are more idiosyncratic in nature,” said Arjun Jayaraman, portfolio manager at Causeway Capital Management. “We do find China to be very inexpensive on a variety of metrics but you have to have higher risk tolerance to buy China.”

All of this circles back to the question of whether Beijing’s efforts to prop up stocks will allow them to catch up with the global rally. The CSI 300 benchmark remains more than 40% lower than a 2021 high.

As Jason Hsu notes, the downfall has been driven by sentiment, which “can just change on a dime.”

“If it’s just sentiment, people are just pessimistic, they are unwilling to invest, they are just risk off, they are just selling, that part is more contained,” said Hsu, chief investment officer at Rayliant Global Advisors. “I am more optimistic than the broader market with regard to long term China growth.”

Yet a sustained rebound will require a shift in investor perception of the country as an unfavorable investment landscape. A January research by Citigroup Inc. showed some of the largest asset managers, which collectively manage some $18.6 trillion of assets, have shifted their positioning to “fully neutral,” and winning back their money will be a tall order.

The types of direct market intervention seen through the so-called national team may ultimately prove insufficient to prop up markets, according to Nick Ferres, chief investment officer for Vantage Point Asset Management.

“All the support measures from the national team, the ban on short-selling and changing the securities regulator leadership are not addressing the key fundamental issues of debt and growth,” he said.

Source:Bloomberg

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Ukadike Micheal

Economic

Stocks

In early Thursday trading, European stocks exhibited stability despite a mixed bag of corporate results, with the Stoxx Europe 600 and France's Cac 40 hovering near flat levels. London's FTSE 100 edged up 0.1%, while Germany's Dax experienced a marginal decline of 0.2%.

Meanwhile, Wall Street's S&P 500 and Nasdaq Composite contracts showed minimal movement, down less than 0.1%. Investors were cautious, eagerly anticipating insights into the future of monetary policy, particularly from speeches by central bank policymakers scheduled for later in the day.

Philip Lane, the chief economist of the European Central Bank (ECB), and governing council member Pierre Wunsch were slated to speak, providing a potential catalyst for market sentiment. Concurrently, the Bank of England's Catherine Mann was scheduled to deliver a speech, further adding to the anticipation among traders.

As market participants eagerly awaited these key insights, the significance of central bank communication on monetary policy became increasingly apparent. The neutral market tone reflected the delicate balance between various factors influencing stock movements, such as corporate performance, economic indicators, and central bank guidance.

Against the backdrop of steady European markets, the technical viewpoint brings attention to the potential impact of central bank communications on investor behavior. Traders often scrutinize policymakers' statements for clues about interest rates, inflation expectations, and overall economic conditions.

The day's trading dynamics demonstrated a subdued response to corporate earnings, emphasizing the current cautious sentiment prevailing in the market. The FTSE 100's modest gain and the Dax's marginal decline underscored the nuanced nature of the economic landscape, where each market is influenced by its unique set of factors.

The anticipation surrounding Philip Lane's fireside chat and Pierre Wunsch's speech suggested that investors were keenly interested in understanding the ECB's stance on economic policies. Similarly, Catherine Mann's address added an additional layer of significance to the day's events, especially considering the potential impact on British markets.

The day's trading activity showcased a measured response from investors as they navigated through mixed corporate results and awaited crucial insights from central bank policymakers. The interplay of these factors highlights the intricate dance between market forces, economic indicators, and the pivotal role of central banks in shaping investor sentiment. As the day unfolded, the markets remained in a state of anticipation, underscoring the importance of carefully monitoring central bank communications for potential market shifts and investment opportunities in the ever-evolving global financial landscape.