Interest rate hike expectations vs inflation concerns, gold bulls and bears war will start?

In the early Asian session on Thursday (February 11), spot gold prices continued their overnight decline and fell slightly. Earlier, as the US CPI rose 7.5% year-on-year in January, gold prices began to climb to the level of $1850 an ounce, supported by concerns about inflation, testing key trading levels. But as expectations of a possible 50 basis point rate hike at the Fed's March meeting were repriced by the market, U.S. Treasury yields and the U.S. dollar rose sharply, and gold prices turned down again.

Inflation hit another 40-year high and market fears mounted

With inflation data in January higher than expected, there are growing fears that price pressures could get worse and last even longer than the Fed expected. The annual inflation rate of 7.5 per cent and the core inflation rate of 6.0 per cent are the highest levels since 1982, and the broad price increase reflects strong demand. This could put the U.S. central bank in a bind, forcing it to tighten monetary policy significantly.

The U.S. Consumer Price Index (CPI) rose 0.6 percent in January and 0.5 percent in December, the Labor Department released on Thursday. That figure exceeded the prevailing expectation of 0.4 percent, which economists had previously predicted. The report said headline inflation rose 7.5 percent this year. Annual inflation was also well above expectations, again setting a 40-year high. Some economists expect inflation to rise to 7.3 percent.

Meanwhile, the core CPI, which excludes food and energy costs, rose 0.6 percent last month, up from 0.6 percent in December. "This is the seventh time in the past 10 months that the CPI has grown by more than 0.5 percent," the report said.

Katherine Judge, senior analyst at CIBC Economics, said, "This confirms that the Fed needs to act quickly to curb inflation, as wage pressures have only increased in recent months." Next month, inflation is likely to accelerate further beyond the 7% mark, while core inflation will also accelerate as energy prices rise, cardinal effects, and strong demand from core categories. ”

Expectations of a 50 basis point rate hike by the Federal Reserve heated up, and US Treasury yields climbed higher with the US dollar

But as expectations of a possible 50 basis point rate hike at the Fed's March meeting were repriced by the market, U.S. Treasury yields and the U.S. dollar rose sharply.

Some analysts pointed out that the gold market failed to secure further buying because the latest inflation data heated expectations for aggressive action by the Federal Reserve next month. Expectations of a 50 basis point hike in March continue to consolidate, and the market is currently digesting the expectation that there could be a six-point rate hike this year. CATHERINE Judge, a senior analyst at CIBC, said. "The overall price increase reinforces the Fed's hardline stance and increases the urgency of raising interest rates."

Brian Price, head of investment management at Commonwealth Financial Network, said: "The possibility of a 50 basis point rate hike has increased significantly. The 10-year Treasury yield is currently trading around 2%. I expect that after this report is released, we will see a return to volatility that prevailed for most of January. Risk assets could go through a tough period before inflation data starts to wane. ”

Bart Melek, head of global strategy at TD Securities, said gold's overnight movements showed that the gold market did not share the Fed's overly aggressive view.

Melek said: "Regardless of the pricing of the bond market, I am not sure the gold market supports the idea that the Fed will take the necessary steps and contain soaring inflation." We currently have a 60% chance of a 50 basis point rate hike in March, but the impact of this on the gold market is uncertain. The Fed still thinks inflation is temporary, do they really want to destroy the economy? ”

The current expectation of the CME FedWatch Tool is that the probability of a 0.5 percentage point rate hike by the Fed in March is 98.6%. In addition to the expectation of a rate hike, the gold market ultimately benefits from its attractiveness as a hedge against inflation. Melek said, "Central banks are likely to buy more gold because inflation lasts longer." "

Two factors pull, gold prices or fall into wide fluctuations

The gold market is currently in a push-pull war, with future interest rate hikes by the Fed weighing down prices, while accelerated inflation will push prices higher.

Michael Boutros, DailyFX strategist, said: "For those who believe inflation will spiral out of control, this is a rare opportunity to buy gold. But at the same time, the Fed's interest rate hike is also bad for gold.

What does this mean for gold? Edward Moya, senior market analyst at OANDA, said the price range is most likely to be between $1800 and $1850 before the market is more certain about the Fed's tightening cycle.

Moya noted: "If the 10-year Treasury breaks above 2.00%, gold prices may show a short-term weakness, but it should not be a signal of the beginning of a bearish trend." As inflation hits more categories, gold may begin to behave more like an inflation hedge, as flattening could limit the dollar's future gains. "

This article originated from Huitong Network