Inflation Data Holds Key to Fed's Next Move

After the latest jobs data failed to provide a clear picture of the US economy, traders are looking to the inflation report to see what the Fed might do next, while uncertainty surrounding the economic outlook continues to support gold prices.

No Significant Changes Yet

Federal Reserve Chair Jerome Powell stated last month that interest rates would remain unchanged until there was a shift in the direction of the labour market or consumer prices. Last Friday's jobs numbers presented a mixed picture, although the initial market reaction was one of modest relief, with stocks rising and bonds retreating. Non-farm payrolls rose by 151K, faster than the downwardly revised 125K in January, but short of the expected 170K. However, it was sufficient to confirm that the economy could still create jobs despite the unemployment rate rising slightly to 4.1%. Total government payrolls were in focus, given the recent efforts of the Department of Government Efficiency (DOGE) to reduce the federal workforce. Still, most of that impact would likely occur after the survey period, so it would not be reflected until the following jobs report. In regards to the effect on inflation, which is now a focus, average hourly wages grew at 4%, slower than the 4.2% expected but within the median of the last six months.

Expectations for the Fed's next rate cut remained essentially unchanged after the data, with only a slight increase in the majority expecting easing in June. Markets are awaiting the upcoming inflation data before making a decision. The consensus is that headline inflation in February will fall to 2.9% from 3%, implying that the winter price surge might be over. The core rate, which is more closely watched by policymakers, is expected to continue its slow downward trajectory to 3.2% from 3.1%.

The Trade Impact

The last inflation report surprised on the upside, weighing on investor pessimism that the US economy was facing a difficult patch. Markets had a rough start to the week after President Donald Trump was ambiguous about the potential for a recession caused by his trade policy. The application and modification of tariffs on America's neighbours last week added to uncertainty, which businesses and markets typically dislike, with growing concerns about the resilience of the US economy.

One of the beneficiaries of the uncertainty, however, is gold, which has maintained its recent gains through the early part of the month. General strength in the dollar has recently kept a lid on the yellow metal, as a potential recession would reduce inflationary pressures and gold's appeal as a store of value. Analysts suggest that gold remains supported as trade tensions keep investors interested in safe-haven assets.

Gold in Correction Phase?

Technically, the consolidation in gold continues to narrow, pointing to a pennant or triangle correction pattern. These two patterns suggest a measured-move target of $3080 per ounce after a successful breakout past $2940 and the record peak of $2945. However, this target may reduce to a lower level if the breakout occurs at a lower point. On the flip side, losing the regional support of $2880 will expose the $2850 swing, increasing the chances of a flag pattern.

Source: SpreadEx / GOLD

Key Takeaways

Markets await the inflation report to evaluate the Fed's next move, with a focus on Trump's trade impact and signs of a potential recession. The uncertainty surrounding the economic outlook has supported gold prices, but as traders grow cautious, the CPI data could provide much-needed clarity on the path ahead.