Gold Upward Movement: US Dollar Falls, and Eyes on CPI Release This Week

By: Miguel A. Rodriguez

10:34, 10 January 2023

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The Federal Reserve Bank of New York reported that one-year inflation expectations fell to 5.0% in December from 5.2% the previous month. 

On a day with virtually no relevant news that could affect the market, the publication of the latest survey by the New York Federal Reserve on inflation expectations brought new impetus to the market, albeit unevenly, as the Dow Jones 30 closed lower owing to a sharp drop in price of J&J and Merck. 


The Federal Reserve Bank of New York reported that one-year inflation expectations fell to 5.0% in December from 5.2% the previous month. This is the lowest level since July 2022 and reinforces the idea that prices have already peaked. Treasury yields fell on the news, with the 10-year yield falling 5 basis points to 3.51%. 


The sentiment among investors that the Federal Reserve will not raise interest rates aggressively is becoming more widespread, giving impetus to stock indices and the fixed-income market, which again gained ground yesterday. Before the important CPI figure is published this Thursday, investors will be very attentive to what Jerome Powell can say today at the Riksbank’s International Symposium on Central Bank Independence in Stockholm


All voting members of the Federal Open Market Committee, including President Powell, have insisted in recent statements on the need to keep rates high for an extended period to end inflation and that federal funds interest rates have not yet reached their terminal level, which is estimated to be slightly above 5%. 


The recent downward movement in bond yields due to optimistic investor sentiment about inflation, which has led to an inverted interest rate curve, may be cause for concern for the Fed because it softens financial conditions, which could delay the fall in inflation, which is the Fed's main goal. Therefore, it is not foreseeable that Jerome Powell will be "dovish" in his statements today; on the contrary, it is possible that he intentionally maintains a harsh tone to avoid unwanted effects on market interest rates. 


If this were the case, it would be time for corrections of the latest movements in the different financial assets, which have been bullish in the indices and bearish in the US dollar, at least until Thursday, when the CPI is published.  


Another asset that has played a leading role in recent days and that could be affected by Powell's statements is gold. The impressive upward movement of the precious metal has been mainly motivated by the fall of the US dollar, with which it maintains a negative correlation.  


Technically, it has reached a reference level that can act as resistance in the 1875 zone. A bearish correction could take it to the 1840 price concentration zone. 

Sources:  Bloomberg, Reuters 

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