Gold prices gained ground late Wednesday during the North American session after a significant inflation report from the United States added pressure on the Federal Reserve’s monetary policy. XAU/USD held steady at $2,897, showing little movement after earlier fluctuations.
Inflation Surge Shifts Fed Outlook, Boosting Gold
The precious metal’s downward trend paused as the US Bureau of Labor Statistics (BLS) reported a jump in inflation, surpassing 3%. This suggests the Federal Reserve may maintain its restrictive monetary policy longer than previously expected. The rise in inflation follows a string of tariff threats from former President Donald Trump, further contributing to the uncertainty in the financial markets.
The latest inflation figures have altered expectations for future Federal Reserve actions. Last week, traders had anticipated a 40 basis point rate cut by year-end. However, after the release of the Consumer Price Index (CPI), those projections were revised down to a mere 30 basis points of easing.
US Treasury bond yields and the US Dollar reacted by moving higher. However, the Greenback struggled to maintain its momentum, erasing the initial post-CPI gains and settling at 107.98, virtually unchanged, as indicated by the US Dollar Index (DXY).
Earlier, Federal Reserve Chair Jerome Powell concluded his testimony before the US House of Representatives. He reaffirmed that inflation remains a critical issue, stressing the need to keep monetary policy restrictive. Powell stated, “We want to keep policy restrictive for now.”
Federal Reserve officials, including Atlanta Fed President Raphael Bostic, echoed Powell’s sentiment. Bostic indicated that if the economy evolves as expected, inflation could reach 2% by 2026. Meanwhile, Chicago Fed President Austan Goolsbee pointed out that multiple inflation readings like January’s would confirm that “the job is clearly not done.”
US Treasury Yields and CPI Report Pressure Gold
The US 10-year Treasury bond yield rose by 9.5 basis points to 4.635%, a headwind for gold. Real yields, which move inversely to gold prices, surged almost 9 basis points to 2.157%. This increase in yields dampened gold’s rally.
The latest CPI data showed a 3% year-on-year increase, marking the first time inflation has risen above 3% in six months. The increase was higher than expected, and the 3.3% rise in the core CPI—excluding volatile items—was also above forecasts of 3.1%. This further emphasizes the ongoing challenges faced by the Federal Reserve in its efforts to tame inflation.
Gold demand from central banks continues to rise. According to the World Gold Council (WGC), central banks purchased over 1,000 tons of gold for the third consecutive year in 2024. In the wake of former President Trump’s electoral victory, central bank gold purchases surged by more than 54% year-over-year, reaching 333 tons.
Market Expectations for Fed Rate Cuts in 2025
Money market futures are pricing in 30 basis points of rate cuts from the Federal Reserve in 2025, signaling investor expectations of a more dovish stance in the future, despite the current inflationary pressures.
Gold Price Outlook: Consolidation Near $2,900
Gold’s price action suggests the potential for further gains, despite recent fluctuations. After printing consecutive pin bars, an indication of indecision, XAU/USD has not experienced significant volatility, following a record high of $2,942 earlier in the week before falling below $2,900.
The Relative Strength Index (RSI) has remained flat, despite being in overbought territory, which may lead to a period of consolidation before a potential breakout.
If gold clears the $2,900 mark, the next key resistance levels will be the record high, followed by the psychological price levels of $2,950 and $3,000. On the downside, support levels are seen at $2,850, followed by the October 31 cycle high turned support at $2,800, and the January 27 swing low at $2,730.
Conclusion
The recent surge in gold prices highlights the growing concerns over inflation and the Federal Reserve’s tightening monetary policy. With US inflation surpassing expectations and the central bank signaling that its restrictive stance will persist, gold continues to attract attention as a safe-haven asset. While the precious metal faces headwinds from rising Treasury yields and stronger real yields, the ongoing inflationary pressures and central bank demand for gold provide a strong foundation for future price movement.
Investors will closely monitor the Fed’s actions and inflation data in the coming months to gauge whether the current trends will persist. As the market adjusts expectations for rate cuts in 2025, gold’s ability to break through key resistance levels could signal continued strength. However, any significant pullbacks could see the precious metal testing support levels around $2,850 and $2,800.