A clear reaction after yesterday’s inflation release is that the large market participants are selling the US Dollar and buying bonds. In simple terms, the market expects the Federal Reserve to become a lot less hawkish going forward which makes the US Dollar less attractive. However, traders should note that the market’s risk appetite has not changed, according to most economists.
The US Dollar’s decline is not the only indication that the market has regarding future interest rates. Yesterday saw a clear correlation between the Dollar and bonds as investors sold the Dollar and bought bonds. As a result, bond yields declined from 3.55% to 3.43% (10-Year US T-Bond). NAGA traders should note that bond yields have been used as an indication of future interest rates for almost a century. Currently, markets continue to price in a small hike and then a pause, before cutting rates later in the year. This has pressured the Dollar, while supporting Gold and bond prices.
The US stock market is also another indication that the risk appetite has not changed after yesterday's inflation figures. US Indices experienced both bullish and bearish price movements before ending the day only slightly higher than the market open price. For example, the SNP500 ended the day on a small 0.33% increase. Bloomberg has confirmed that the market is simply switching one safe haven asset for another.
The consumer price index came in as expected. The latest figures are confirmed below:
- Consumer Price Index: reads -0.1% vs -0.1% expected (previously 0.1%)
- Core Consumer Price Index: reads 0.3% vs 0.3% expected (previously 0.2%)
- Yearling Inflation Rate: reads 6.5% vs 6.5% expected (previously 7.1%)
The level of volatility was generally low compared to previous announcements because the reports were as expected and had already been priced into the market.
XAU/USD - Gold Continues to Renew its Highs
The price of Gold increased for a sixth consecutive day and is so far maintaining yesterday’s price highs. Gold reached a new price high climbing to $1,901 before losing momentum. The instrument during this morning’s Asian session is trading slightly lower at $1,900, but this has formed nothing more than a retracement.
The price has been climbing consecutive for six days which have sparked indications from technical analysts that the price may soon form a retracement. This also follows most wave theories with the instrument forming an impulse wave measuring more than 4%. However, most economists have advised that the bulls are likely to control the Gold market in the longer term.
In terms of fundamentals, influential factors continue to support a potential continuation of Gold’s bullish trend throughout 2023. Gold has been supported by the weakening US Dollar as well as a predicted end to the current monetary policy cycle. In addition to this, economists are also concerned about the economic conditions in the second half of the year. Poor market sentiment and deteriorating economic conditions are known to support Gold due to its status as a safe haven asset.
This can not only be seen among economists but also in large US companies. In November and December 2022, many technology-based companies significantly reduced their employment force by up to 10%. This has also been experienced this month by the banking sector. For example, Goldman Sachs has announced the largest layoff plan since the 2008 banking crisis. Goldman Sachs plans to reduce staff by over 3,000.
Economists have advised that the economy is under pressure from high inflation, sanctions, high-interest rates and a weakening Chinese economy. China has confirmed that exports have declined for a third consecutive quarter. It has also been confirmed that inflation is not declining as much as the Federal Reserve would have liked. For example, Core CPI figures rose this month from 0.2% to 0.3%.
The US Commodity Futures Trading Commission has confirmed in its latest report that the number of speculated positions on Gold has increased to more than 140,000 positions. The report has also confirmed that bulls currently have the edge over bears. Throughout the day investors will continue to evaluate the latest CPI announcements and also anticipate this afternoon’s Prelim UoM Consumer Confidence.
Summary:
- Lower inflation rate and a less restrictive Federal Reserve continues to pressure the US Dollar.
- Inflation read as expected in the latest Consumer Price Index announcement.
- Stocks slightly rise but see limited gains due to economic concerns. Large firms continue to reduce their workforce in an attempt to limit expenses.
- Gold reaches new price highs and the number of positions within the US again increases.
