The recent report by the Commerce Department has revealed that inflation is cooling in the United States. With a reading of 2.9% yearly, there has been a decline of 0.3% when compared to the previous month’s inflation level. This indicates that the recent restrictive monetary policy of the Federal Reserve has made an impact on inflation. Furthermore, the unexpected resilience of the U.S. economy has also contributed to this decline. In this article, we will explore the impact of inflation and geopolitical tension on gold prices.
Gold prices are highly sensitive to inflation. As inflation increases, investors seek safe haven assets like gold to protect their wealth. However, the recent decline in inflation has had a limited effect on gold prices. Market participants seem to be more focused on the upcoming first FOMC meeting of the year, where the Federal Reserve is expected to provide further insights into its monetary policy. While there is acknowledgment that the Federal Reserve will eventually cut interest rates this year, it is unlikely to happen this month or even at the March FOMC meeting.
Despite the decline in inflation, gold futures have been trading flat. As of 5:15 PM EST, the most active February contract is up by only $0.40 or 0.02% at $2018.20. Similarly, U.S. equities have also experienced minimal price movement. Looking at the long-term performance of gold, it can be noted that prices have declined in three of the last four weeks. The market seems to be lacking clarity and is eagerly waiting for the Federal Reserve meeting for more insights.
Geopolitical tension, especially in regions like the Red Sea, can impact gold prices. A recent report revealed that Houthi militants fired a ballistic missile at the USS Carney in the Gulf of Aden. Although the missile was successfully shot down, this incident marks the 37th strike on merchant and U.S. Navy ships since November 19. Typically, gold prices would react to such geopolitical conflicts. However, in this case, the market is more focused on the upcoming FOMC meeting, indicating that the impact of geopolitical tension is currently being overshadowed.
The Federal Reserve’s monetary policy decisions have a significant influence on gold prices. According to the CME’s FedWatch tool, there is currently a low probability of a rate cut this month, with a 2.6% chance. However, the probability increases substantially by March, with a 46.2% chance of a rate cut of at least 0.25%. The market expects the Federal Reserve to pivot and cut interest rates by May, with only a 9.9% chance that rates will remain unchanged after the May 24 FOMC meeting.
The recent report on cooling inflation and geopolitical tension in the Red Sea have had a limited impact on gold prices. The market is more focused on the upcoming FOMC meeting and the Federal Reserve’s monetary policy decisions. While inflation and geopolitical conflicts traditionally influence gold prices, they are currently taking a backseat to the anticipation surrounding the Federal Reserve’s pivot. It will be important for market participants to closely monitor the Federal Reserve’s statement and Chairman Powell’s press conference next Wednesday to gain further clarity on the future direction of gold prices in light of the major monetary policy pivot.
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