Gold Rises as Markets Expect More Fed Rate Cuts After CPI Release
Gold ( XAU/USD ) increased by 0.7% on Wednesday as the US dollar (USD) weakened following the release of lower-than-expected US Consumer Price Index (CPI).
Yesterday's US CPI report eased inflation concerns and raised hopes that the Federal Reserve ( Fed ) may not have finished its easing cycle. Core CPI , which excludes volatile items like food and energy, rose 3.2% annually, compared with an expected 3.3% rise.
"Core CPI came in a little bit below expectations. This is a bit of a positive for gold. The corollary to this is that the Fed will not necessarily exclude the possibility of cutting rates", said Bart Melek, head of commodity strategies at TD Securities.
According to Reuters, markets now expect the Fed to deliver 40 basis points (bps) worth of rate cuts by year-end, compared with the anticipated 31 bps before the inflation data release. Gold, which has no passive yield, tends to rise in a low-interest-rate environment. Additionally, ongoing uncertainty about global tariffs and trade policies and their potential to hinder economic growth is expected to maintain demand for gold as a safe-haven asset.
XAU/USD was rising during the Asian trading session but started to fall during the early European hours. Today, more US macroeconomic data may indicate where US interest rates are heading. Investors are bracing for the simultaneous release of three reports at 1:30 p.m. UTC: Retail Sales , Jobless Claims , and Philadelphia Manufacturing Index .
Better-than-expected results may prompt investors to expect fewer rate cuts from the Fed, which will likely push the gold price down. Conversely, worse-than-expected figures may raise the probability of a 25-bps rate cut in March, which will almost certainly pull XAU/USD higher.
"Spot gold may extend gains into a range of $2,714 to $2,719 per ounce, as suggested by a projection analysis and a rising wedge", said Reuters analyst Wang Tao.
Euro Struggles to Strengthen Despite Lower US Inflation
The euro ( EUR/USD ) lost 0.17% against the US dollar (USD) during a very volatile trading session on Wednesday.
Initially, EUR/USD rallied above the critical 1.03500 level following the release of lower-than-expected US Consumer Price Index (CPI) numbers. However, the pair lost all of its gains and closed below the 1.02900 level. US CPI report eased fears that inflation was accelerating and increased the chances the Federal Reserve (Fed) could cut interest rates twice this year. Still, the data failed to break the fundamental bearish trend in EUR/USD.
"Dollar strength is not going to end because of this (CPI) number. It's going to probably become more nuanced, and we might see the dollar continue to be strong against the European currencies", said Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management.
The US economy is still overperforming the eurozone economy, and the European Central Bank (ECB) is still projected to deliver more rate cuts than the Fed in 2025. EUR/USD was falling during the Asian and early European trading sessions. Today, more US macroeconomic data give more insights into the US interest rate path. Retail Sales, Jobless Claims, and Philadelphia Manufacturing Index reports will come out at 1:30 p.m. UTC. Better-than-expected results may indicate a possibility of fewer rate cuts by the Fed, likely pushing EUR/USD down. Conversely, worse-than-expected figures may raise the probability of a 25-basis-point rate cut in March, almost certainly pulling EUR/USD higher.
Canadian Dollar Seems to Find Support
USD/CAD declined for a third consecutive session on Wednesday. However, the decline was limited as traders' caution about expected US trade tariffs offset cooler-than-expected US inflation data.
The increase in the US core Consumer Price Index (CPI), excluding volatile food and energy components, slowed down towards 3.2% in December, down from 3.3% in the previous month. The slowdown indicated a possible reduction in interest rates by the Federal Reserve (Fed) in the near future. Michael Goshko, senior market analyst at Convera Canada ULC, said that the US dollar (USD) is still in high demand. Until there is a clear understanding of the situation regarding tariffs, currency traders will likely maintain their long positions in the US dollar. Gretchen Whitmer, governor of Michigan, expressed concern that the proposed 25% tariffs on imports from Mexico and Canada by President-elect Donald Trump could harm the US automotive industry, increase vehicle prices, and benefit China.
Meanwhile, Canadian economic data revealed that home sales decreased by 5.8% in December compared to November, although they remained up by 10% in Q4. The decline happened due to the Bank of Canada reducing interest rates. Also, the oil price—one of Canada's major export commodities—increased by 2.8% towards $80 per barrel, driven by a significant drawdown in US crude oil inventories and potential disruptions to supply caused by new US sanctions against Russia.
USD/CAD was growing during Asian and early European trading hours. Today, the market expects two US reports: Retail Sales and Jobless Claims data, both coming out at 1:30 p.m. UTC. A better-than-expected retail sales number may support USD/CAD, while a higher-than-expected jobless claims figure may put downward pressure on USD/CAD.