12/22/2023

Dollar and gold ahead of inflation data

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Key points:

  • The dollar steadied above a more than four-month low, helped by expectations that the Federal Reserve will cut interest rates next year.
  • Gold reached its highest level in almost three weeks, also amid expectations that the Federal Reserve will cut interest rates.
  • All eyes are on the November personal consumption price index report, due at 13:30 GMT.

On the eve of important US economic data, we see simultaneous growth in both the dollar and gold.

 

The dollar strengthened slightly

The US dollar stabilized slightly above a four-month low on Friday, as traders await a key inflation data release that could influence the Federal Reserve’s monetary policy stance in 2023.

The dollar index, which measures the greenback’s value against a basket of major currencies, was on track for a weekly decline of around 0.8%, extending its previous week’s 1.3% drop.

The Australian dollar, on the other hand, experienced a slight decline of 0.09% to $0.6797, but remained close to its five-month high of $0.68035 touched on Thursday.

The British pound held steady at $1.26905, poised for modest weekly gains, despite being weighed down by UK inflation data released earlier in the week that fell short of expectations.

In Asian trading, the Japanese yen held firm at 142.09 per dollar.

Gold reaches highs

Gold prices soared to their highest levels in nearly three weeks on Friday, lifted by renewed hopes of a Federal Reserve interest rate cut early next year.

The precious metal gained 0.2% to $2,048.99 an ounce, after touching its highest level since December 4 earlier in the session. Bullion prices have risen 1.5% this week, driven by the prospect of a more dovish Fed stance.

U.S. gold futures also climbed, rising 0.5% to $2,060.50 an ounce, as investors looked towards Friday’s release of the US Personal Consumer Expenditures Price Index (PCE).

All eyes on economic data and the Fed

The focus of the market is on the Personal Consumption Price Index (PCE) data for November, the Federal Reserve’s preferred measure of core inflation, which is due to be released at 13:30 GMT. This data will provide more clarity on the trajectory of US interest rates.

Market participants expect the PCE index to rise 3.3% year on year, up from 3.5% in October. A higher-than-expected reading could dampen expectations of a rate cut by the Federal Reserve.

The dollar index, which measures the value of the US dollar against a basket of major currencies, is hovering near a five-month low. This makes gold more attractive to investors holding other currencies. Meanwhile, the yield on the benchmark 10-year US Treasury note is hovering near its lowest level since July.

According to the CME’s FedWatch tool, traders now see a 83% chance of a US rate cut by March. Lower interest rates reduce the opportunity cost of holding non-yielding gold.

Despite recent comments by Federal Reserve officials opposing the idea of quickly cutting rates next year, these remarks have had little impact on investor sentiment. The market is still pricing in a high probability of a rate cut by March.

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