Gold Braces for US Data Impact

Markets remain nervous as they await the release of the Fed's preferred inflation indicator, as concerns rise that the US economy might not be as strong as initially expected.

Growing Obstacles

Tuesday witnessed a lacklustre performance following the release of disappointing US consumer confidence data, as the potential impact of tariffs remains a significant concern. Recent economic data has not been particularly encouraging either, with the recent consumer confidence release for February, the first release since President Donald Trump took office, falling to its lowest level in eight months. Furthermore, consumer expectations for inflation over the next 12 months rose sharply, with many expecting the fastest rate of price increases in 18 months, which may encourage the Federal Reserve to stick to the hawkish side.

Traders initially reacted by rotating out of stocks and into Treasuries, which would typically support the price of the yellow metal. However, the potential effect on discretionary spending coupled with the risk of an economic slowdown in the US was seen limiting demand for gold. Nonetheless, this was a short-lived occasion and markets recovered through Tuesday night, with risk appetite resuming and expectations for rate cuts readjusted. Futures show that the market is once again expecting the next rate cut from the Fed to occur at the June meeting, with all eyes now focused on the upcoming key data releases.

Regaining Optimism

The Fed's preferred measure of inflation is set to be released on Friday and has garnered renewed interest from the markets after Fed Chair Jerome Powell clarified before Congress that the FOMC would maintain rates unchanged unless there was a significant shift in inflation. However, with consumers expecting higher prices, there is a risk that expectations could become “unanchored”, and current monetary theory suggests that the central bank should signal hawkishness to prevent prices from rising. In other words, only a strong indication of slowing inflation would likely be required for the markets to genuinely cheer the result.

The consensus is that the core PCE price index will rise 0.4% in January, compared to 0.2% in February, likely driven by the same factors that led to an increase in CPI earlier in the month: a lack of inventory in certain high-ticket items, such as cars. However, the markets could overlook this if the annual rate comes in lower than expected at 2.7%, down from 2.8% previously. What could be more pressing for gold, however, is the implication for the economy. The yellow metal slipped 2.2% during Tuesday trading in response to signs that the US economy might be underperforming. But the second reading of the US Q4 GDP is scheduled for Thursday and is expected to confirm the 2.3% surprise deceleration that appeared in the flash number. A revision here could heighten market concerns or provide reassurance that the world's largest economy can power through the effects of tariffs.

Sideways Gold Signals Breakout

The formation of a rectangle top pattern on gold could be an early indication of a potential rebound, either immediately from $2900 per ounce upwards or around the $2890 level. This case could lead to mirroring the measured-move height from $2975 towards the $3050 handle, with interim resistance at $3000 and the $3025 round levels. Conversely, sliding below the lower end of the rectangle pattern would suggest that the precious metal might be poised for deeper declines below $2855.

Source: SpreadEx / GOLD

Key Takeaways

While markets remain concerned over the strength of the US economy and the potential impact of tariffs, traders will closely watch the upcoming PCE data and GDP figures on Friday and Thursday for their implications on monetary policy and, by extension, gold prices. The formation of a rectangle top pattern on gold suggests a rebound in the face of economic headwinds, though how it pans out will depend on whether support holds firm in the case of a deeper pullback.