Gold Prices Looked Past An Inflation Beat, But Broader Outlook Remains Bearish

Gold prices finished the past 24 hours relatively flat as critical competing headlines fought for the attention of the yellow metal. First, all eyes were on January’s US CPI report. Headline inflation clocked in at 6.4% y/y against the 6.2% estimate.

This was also higher than a prediction I made using a lag analysis model. Still, it was within the error region. More importantly, the model sees February CPI at 6.3% y/y. Combined with a stronger-than-anticipated core reading, this is not great news for the Federal Reserve, which is trying to bring inflation down to a medium-term average target of about 2%.

Financial conditions have been easing since the end of last year as markets priced after the tightening cycle and then some (in the form of anticipated rate cuts towards the end of this year). Including today’s CPI report, markets have added about three rate hikes to the 2-year outlook since the day before January’s non-farm payrolls report blowout.

As a result, the 2-year Treasury yield has rallied almost back to highs from November. This is as the US Dollar found some support. Unsurprisingly, this combination has not been working out great for gold.

Despite the unexpectedly sticky CPI report, gold prices were relatively mute. That is likely due to Fedspeak. Philadelphia Fed President Patrick Harker noted on Tuesday that the central bank was zeroing in on where rates could be restrictive enough – a sign that peak rates might be soon around the corner. But, he also added that the Fed might have to do more.

This likely points to a Fed that might keep rates restrictive for longer. Despite what occurred with gold over the past 24 hours, this may continue spelling more trouble for the anti-fiat yellow metal down the road. Later today, the US will release January retail sales. Tangible outcomes could risk adding further downside pressure to XAU/USD.

On the daily chart, gold is trying to extend losses under the 50-day Simple Moving Average (SMA). That offers an increasingly bearish perspective, focusing on the 38.2% Fibonacci retracement level at 1828. In the event of a turn higher, the 20-day SMA could hold as resistance, maintaining the near-term downside focus.