Gold Prices Rise as Markets Anticipate Fed Rate Cuts

Gold prices rise: gold prices are experiencing an upward trend as investors react to growing expectations of Fed rate cuts.

Gold (XAU/USD) saw a 0.7% increase on Wednesday as the U.S. dollar (USD) weakened following the release of lower-than-expected U.S. Consumer Price Index (CPI) data.

The latest CPI report has alleviated inflation concerns and raised expectations that the Federal Reserve (Fed) may still be in its easing cycle. Core CPI, which excludes volatile categories like food and energy, rose 3.2% annually, compared to the anticipated 3.3% increase.

Analyst Insights on CPI Report

"Core CPI came in a little bit below expectations. This is positive for gold, as it suggests that the Fed may consider rate cuts," said Bart Melek, head of commodity strategies at TD Securities.

Market Expectations for Fed Rate Cuts

According to Reuters, markets now anticipate the Fed will implement 40 basis points (bps) of rate cuts by the end of the year, an increase from the previous expectation of 31 bps before the inflation data was released. Gold, which does not generate a yield, typically performs well in a low-interest-rate environment. Additionally, ongoing uncertainties regarding global tariffs and trade policies are likely to sustain demand for gold as a safe-haven asset.

Market Movements and Upcoming Data

XAU/USD was rising during the Asian trading session but began to decline in early European hours. Investors are preparing for the simultaneous release of three key U.S. reports at 1:30 p.m. UTC: Retail Sales, Jobless Claims, and the Philadelphia Manufacturing Index.

Better-than-expected results may lead investors to predict fewer rate cuts from the Fed, likely resulting in a drop in gold prices. Conversely, disappointing figures could raise the probability of a 25-bps rate cut in March, which would likely push XAU/USD higher.

Gold Price Projections

"Spot gold may extend gains into a range of $2,714 to $2,719 per ounce, as suggested by projection analysis and a rising wedge," stated Reuters analyst Wang Tao.

Euro Struggles to Gain Ground Despite U.S. Inflation Data
The euro (EUR/USD) fell by 0.17% against the U.S. dollar on Wednesday during a volatile trading session.

Initially, EUR/USD rallied above the critical 1.03500 level following the release of the lower-than-expected U.S. CPI numbers. However, the pair lost all gains and closed below 1.02900. The CPI report eased concerns about accelerating inflation and increased the likelihood of the Fed cutting interest rates twice this year. Still, this data failed to break the fundamental bearish trend in EUR/USD.

Expert Commentary on CPI number

"Dollar strength is unlikely to diminish due to this CPI number. We may see the dollar continue to strengthen against European currencies," said Peter Vassallo, FX portfolio manager at BNP Paribas Asset Management.

With the U.S. economy continuing to outperform the eurozone, and the European Central Bank (ECB) expected to implement more rate cuts than the Fed in 2025, EUR/USD was falling during both Asian and early European trading sessions. More U.S. macroeconomic data will provide greater insight into the U.S. interest rate direction, with key reports due out at 1:30 p.m. UTC.

Canadian Dollar Finds Support

USD/CAD declined for a third consecutive session on Wednesday, though the decline was limited as traders exercised caution regarding expected U.S. trade tariffs, offsetting the impact of cooler-than-expected U.S. inflation data.

The U.S. core CPI increase slowed to 3.2% in December, down from 3.3% the previous month, indicating a potential reduction in Fed interest rates. Michael Goshko, senior market analyst at Convera Canada ULC, noted that the U.S. dollar remains in high demand. Until there is more clarity on tariff situations, currency traders are likely to maintain long positions in the USD.

Canadian Economic Data

Recent Canadian data showed a 5.8% decrease in home sales in December compared to November, although they remained up 10% in Q4. This decline is attributed to the Bank of Canada reducing interest rates. Meanwhile, oil prices—key to Canada's economy—rose by 2.8% towards $80 per barrel, driven by significant draws in U.S. crude oil inventories and potential supply disruptions from new U.S. sanctions against Russia.

USD/CAD showed gains during Asian and early European trading hours. The market is anticipating two U.S. reports—Retail Sales and Jobless Claims—set for release at 1:30 p.m. UTC. A better-than-expected retail sales figure could support USD/CAD, while a higher-than-expected jobless claims figure may exert downward pressure.

Conclusion

As gold prices rise amid expectations of Fed rate cuts following the CPI release, market dynamics continue to evolve. Investors should stay informed about upcoming macroeconomic data that could influence the direction of gold, the euro, and the Canadian dollar in the near term.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.