US CPI to determine whether rally in gold continues or halts amid Fed rate cut hopes

US CPI to drive gold price next week

Ravindra V Rao

Anticipation of a rate cut by the US Federal Reserve (central bank) in June has ignited positive momentum across various asset classes, propelling gold to unprecedented highs. Initially (during the week ended March 8) the US dollar dipped sharply to a one-month low of 103.2 amid hints from Fed Chair Jerome Powell about potential interest rate cuts this year. Powell acknowledged the possibility of dialling back restrictive policies if signs of moderating inflation prove sustainable. However, he emphasised that there is no rush to cut rates, and the Fed seeks confidence in the inflation moving sustainably towards 2 percent.

The greenback further plunged to 102.36 at the end of last week, the lowest since mid-January, as downward revisions to US job growth in January 2024 and December 2023 hinted at a softening US labour market.

The COMEX Gold market marked its third consecutive weekly gain (week ended March 8), surging over 4.5 percent to a record high of $2,203 per troy ounce. The surge was supported by tumbling US treasury yields and dollar index amid weak US data. Renewed concerns about the US banking sector and Powell's testimony, perceived as slightly dovish, have contributed to the bullish trend in the precious metal.

US economic data released last week has indicated an economic slowdown, strengthening the case for a rate cut later this year. The collapse in shares of New York Community Bancorp further reignited concerns about the health of regional US lenders, putting additional pressure on treasury yields.

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Ravindra Rao

Head - Commodity Research|Kotak Securities

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Gold prices have managed to remain high, as robust central bank buying offset declining ETF outflows. On the price front, COMEX gold managed to breach stiff resistance near $2,150 per troy ounce, and there is a potential target of $2,250. However, this is contingent upon the swing support of $2,100 holding on a closing basis.

LME base metals, too, rallied close to the highest levels of 2024 on rising expectations of a Fed pivot, and hopes that Chinese authorities would take further steps to support growth during the country’s ongoing National Congress. Metals are also likely to be supported by a softer dollar in the coming weeks, however, traders’ moods may swing with the inclusion or absence of major new policy initiatives by China in key demand areas like real estate and infrastructure.

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On the price front, MCX Copper has given a bullish breakout of its ‘Cup & Handle’ chart pattern, affirming control in the hands of the bulls. A break above Rs 736 per kg on closing may push prices up to its next hurdle, at Rs 745.80.

WTI Crude prices surged above $80 per barrel for the first time since November as OPEC+ extended its 2 million barrels per day oil supply cutbacks until the end of June. However, the uptick was short-lived as prices fell to $78 per barrel, with investors refocusing on demand concerns and continued build-up in US inventories.

Markets are growing optimistic that the Fed's concerns regarding inflation from a resilient labour market have been alleviated to some extent, given the increase in the unemployment rate for the first time in four months and easing wage growth inflation.

In the coming week, the spotlight will be on US inflation numbers. A continuation of the disinflationary trend may add to rate cut bets, boosting gold prices to new highs. Conversely, a hotter-than-expected figure may lead market participants to factor in fewer rate cuts for the year.

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The author is Head, Commodity Research, at Kotak Securities.