Gold Under Pressure Ahead of EU CPI, FOMC Mins

Gold struggles despite economists appearing concerned over the ECB's delayed rate cut timeline as markets expect the FOMC minutes to confirm a widening policy divergence.

Eurozone Inflation Test Looms

Euro Area inflation takes centre stage on Tuesday, with economists expecting an uptick to 2.5% from 2.4% and core inflation to remain steady at 2.7%. The ECB's recent stance has allowed for policy easing despite above-target inflation, though the landscape grows increasingly complex for European policymakers.

The expiration of the agreement to transport gas from Russia through Ukraine has driven up energy prices, a key driver of inflation and an obstacle to economic growth. As such, economists expect further easing from the ECB as the European economy struggles to gain momentum. The consensus is that the EU economy will grow at just 0.9% next year, less than half the pace of the US.

As the upside risks for inflation stem from factors beyond the control of monetary policy, such as geopolitics raising energy prices and a potential trade war, economists believe that the ECB will cut rates by 100 basis points this year. However, the ECB might manage to hold out until the peak of the expected winter inflation bump has passed, with rising headline inflation bolstering the case for the ECB hawks.

FOMC Minutes in Focus

Investors eagerly await the FOMC meeting minutes to be released on Wednesday, focusing on whether the latest job numbers uptick has changed members' views on economic concerns versus inflation.​ The Committee's December deliberations saw rates held at 5.25-5.50% with a split 9-1 vote. The Fed's updated projections signalled just two 25 bps cuts in 2025, though individual member forecasts showed varying views on the path ahead. Chair Powell emphasised that future cuts would respond to data, suggesting a more measured approach to policy adjustments while stressing the economy remains strong with inflation moving closer to target.

Still, the world's largest central banks are easing, which acts as a catalyst for higher gold prices as the yellow metal generally moves based on interest rates. Additionally, increased uncertainty could keep gold attractive as a safe haven over the coming year. In the short term, higher interest rates could slow the path towards the $2900 per ounce level that some analysts project.

Gold in Symmetrical Triangle?

Gold appears to be forming a symmetrical triangle pattern since October's peak of $2800, with prices consolidating between a descending trendline to $2550 and an ascending resistance around $2760. The pattern suggests falling volatility as prices approach the apex, with the recent rejection at $2600 acting as a potential bottom. A move above the $2680 resistance might trigger bullish price action toward $2900, while a break below $2550 could see further downside towards $2500.

Source: SpreadEx / GOLD

Key Takeaways

The contrasting policy stances between the ECB and Fed continue to impact gold as both central banks steer through different economic challenges. On the one hand, the ECB is expected to cut rates by 100bps on the back of sluggish growth and persistent inflation risks. On the other hand, the Fed has shifted to a less dovish outlook and is expected to follow a more cautious stance on easing. The contrasting expectations, coupled with gold's triangle pattern, suggest increased volatility ahead as markets digest both central banks' guidance and upcoming economic data.