Gold price (XAU/USD) delivers a strong recovery in Thursday’s early American session as the United States core Personal Consumption Expenditure Price Index (PCE) for January softens as expected. The soft underlying inflation data is expected to heighten hopes of Federal Reserve (Fed) rate cuts in the June monetary policy meeting. The opportunity cost of holding non-yielding assets, such as Gold, drops when the Fed considers rate cuts.
As expected, the annual inflation data decelerated to 2.8% from 2.9% in December. The monthly core PCE Price Index data increased by 0.4%, which aligns with market expectations. In December, the underlying inflation grew at a moderate growth of 0.2%. This would dampen the appeal of the US Dollar and bond yields. The US Dollar generally faces foreign inflows when the Fed shifts from a hawkish stance to neutral guidance.
Market participants were expected to pay close attention as it is the Fed’s preferred inflation tool. It doesn’t get distorted by base effects and provides a clear view of underlying inflation by excluding volatile items.
The market expectations for rate cuts in the March and May policy meetings are not expected to heighten significantly, even though the inflation report has turned out softer than expectations. Fed policymakers need good inflation data for months to consider a change in the monetary policy stance. Therefore, one good progressively declining inflation data point would not be enough to force policymakers to swiftly unwind their restrictive policy stance.
Source: FXstreet
