Gold price fails to hold gains as Fed pushes against rate-cut hopes in March

• Gold price falls back as the “early rate-cuts” narrative wanes.
• The Fed needs more evidence to be confident that inflation will return to 2%.
• The US Dollar advances ahead of ISM Manufacturing PMI, NFP data.

Gold price (XAU/USD) surrenders recent gains on Thursday’s European session, but continues to trade inside Wednesday’s trading range. The upside in the Gold price is restricted as the Federal Reserve (Fed) has pushed back expectations of a rate cut in March. However, the downside is also well-supported as almost all Fed Monetary Policy Committee members (MPC) members favored rate cuts in 2024.

Fed Chair Jerome Powell showed disinterest in rate-cut speculation, arguing that policymakers are still unconvinced that underlying inflation will sustainably return to the 2% target. As Jerome Powell has spooked expectations of rate cuts in March, investors have turned to May’s policy meeting for the first rate cut of this cycle.  

As we advance, the inflation outlook will be guided by labor market conditions, consumer spending, and economic growth, which will set a fresh undertone for rate-cut expectations. 

Meanwhile, investors await January's Institute for Supply Management's (ISM) Manufacturing PMI and the Nonfarm Payrolls (NFP) data. The expectations of a rate cut at May’s Fed monetary policy meeting could wane if the employment and wage growth data turn out higher than expected.

Daily digest market movers: Gold price off from day’s high while US Dollar advances

• Gold price falls from the day’s high near $2,050 as investors shift back to the narrative that the Federal Reserve is not interested in reducing interest rates in March.
• In his monetary policy statement on Wednesday, Fed Chair Jerome Powell turned down speculation for reducing interest rates until policymakers get greater confidence that underlying inflation will sustainably return to the 2% target.
• A strict denial for rate cuts in March has shifted expectations to the May policy meeting.
• As per the CME Fedwatch tool, traders see a 61% chance of a rate cut by 25 basis points (bps) to 5.00%-5.25% for May.
• The Fed’s decision to keep interest rates unchanged in the range of 5.25%-5.50% for the fourth straight time was widely anticipated.
• Also, Jerome Powell said, “risks to achieving full employment and 2% inflation are better balanced.”
• The US Dollar Index (DXY) rises to near 103.80 as expectations for rate cuts shift to May. Until then, various economic data are lined up that will guide further action in the safe-haven assets.
• In today’s session, market participants will focus on the ISM Manufacturing PMI for January and the Initial Jobless Claims (IJC) for the week ending January 26.
• According to the estimates, the Manufacturing PMI fell to 47.0 from December’s reading of 47.4. The reasoning behind lower factory output would be higher furloughs due to the festive mood.
• The Manufacturing PMI data will be followed by the official Employment data for January, which will be published on Friday.
• The private Employment Change data, reported by the ADP on Wednesday, showed that private employers recruited 107K workers in December, which was significantly lower than expectations of 145K and the former reading of 158K.
• This has set a negative undertone for the NFP data ahead. Investors anticipate that overall payroll additions slowed to 180K against 216K in December. The Unemployment Rate is expected to increase to 3.8% from 3.7%.
• Apart from employment numbers, wage growth data will in be the focus as it will guide inflation, being a major contributor to high price pressures.
• The annual Average Hourly Earnings is seen steady at 4.1%. The month-on-month wage growth may have grown at a slower pace of 0.3% against a 0.4% increase in December. A slowdown in the wage growth data would soften the inflation outlook.

Technical Analysis: Gold price trades inside Wednesday’s range

Gold price oscillates inside Wednesday’s trading range as investors shift focus toward the US ISM Manufacturing PMI and the Employment data. From a technical perspective, the outlook for the precious metal is upbeat as it has delivered a breakout of the Symmetrical Triangle chart pattern formed on a daily timeframe. The 20-day Exponential Moving Average (EMA) at $2,032.50 is acting as a cushion for the Gold price.

The 14-period Relative Strength Index (RSI) is approaching the 60.00 hurdle. If the RSI manages to sustain above the hurdle, bullish momentum could be triggered.