The gold (XAU/USD) price rose 0.18% on Wednesday even though the US inflation figures were higher than expected, supporting the case for fewer rate cuts by the Federal Reserve (Fed) this year.
XAU/USD dropped more than 1% after data showed that the US consumer price index (CPI) jumped by 0.5% last month, above the 0.3% expected by the market. The CPI report reinforced the Fed's latest message that it was in no rush to resume cutting interest rates amid growing economic uncertainty.
"With today's CPI data coming in hotter-than-expected, that has put weight on the gold market. Obviously, at this point, any expectation that the market would have had of any type of rate cut later this year has now been put down", said David Meger, director of metals trading at High Ridge Futures.
Despite hotter-than-expected inflation, gold recouped all yesterday's losses and closed above the critical $2,900 level. Investors seem to continue buying the dips in XAU/USD due to strong safe-haven demand. The demand persists due to fears of a global trade war spurred by US President Donald Trump's new tariffs.
"Higher interest rate storyline provided a little bit of pressure on gold, the trend remains positive and trade concerns continue to drive the market", said Peter Grant, vice president and senior metals strategist at Zaner Metals.
XAU/USD rose during the Asian and early European trading sessions. Despite a minor sell-off, even a drop of a few hundred dollars from nearly $3,000 isn't catastrophic, said Daniel Pavilonis, senior market strategist at RJO Futures. He added that with concerns about inflation, debt, and geopolitics, people still invest in gold. Today, traders should focus on another US inflation measure, the US Producer Price Index (PPI), due at 1:30 p.m. UTC. Even if the figures are higher than expected, the bullish trend in XAU/USD will likely remain intact.
"A break above $2,919 may signal the development of a new wave towards the $2,951 to $2,971 range", said Reuters analyst Wang Tao.
Euro Rises Despite Hot US Inflation
The euro (EUR/USD) gained 0.21% against the US dollar (USD) on Wednesday, following Bundesbank President Joachim Nagel's hawkish comments and despite higher-than-expected US consumer price index (CPI) numbers.
US headline inflation rate rose to 3% in January, a seven-month high, and a full percentage point above the Federal Reserve's (Fed) target rate. The data raised the likelihood that the Fed will hold interest rates higher for longer, but it looked anomalous and unlikely to signal a larger trend towards higher prices.
"January is a tricky month because a lot of annual price increases are announced for all sorts of things, and sometimes they are chunky. We are not inclined to expect a repeat next month", said Thomas Simons, chief US economist at Jefferies.
The belief that January's CPI was an anomaly explains why the US Dollar Index (DXY) weakened on Wednesday, pushing higher other major currencies, including the euro. Also, Bundesbank President Joachim Nagel's comments provided a boost to EUR/USD. He said the European Central Bank (ECB) should ease policy gradually and not target a difficult-to-define 'neutral' level for interest rates.
EUR/USD rose during the Asian and early European trading sessions. Today, the main event is the US Producer Price Index (PPI), due at 1:30 p.m. UTC. Furthermore, several eurozone reports will be released, the most important of which is the eurozone Industrial Production at 9:00 a.m. UTC. Traders should also monitor the developments around US trade tariffs. The White House said the Trump administration would announce tariffs on every country that charges duties on US imports, probably including the eurozone. If implemented, tariffs will have an immediate bearish impact on EUR/USD.
Trade War Worries and Political Rhetoric Pressure Canadian Dollar
The Canadian dollar (USD/CAD) lost 0.13% against the US dollar (USD) on Wednesday, even as the US Dollar Index (DXY) weakened despite hotter-than-expected US inflation reading.
USD/CAD has been in a downtrend since 3 February after US President Donald Trump agreed to postpone 25% tariffs on all Canadian goods and 10% on oil until early March. Still, threats of new tariffs and talks about making Canada a 51st state shake the Canadian dollar.
'I think Canada would be much better off being a 51st state', the US president said recently, continuing a pressure campaign that initially ramped up in December. Earlier this week, Canadian Prime Minister Justin Trudeau warned the country's business leaders that Trump's desire—which seemed like a joke—was a 'real thing'. Overall, the recent bellicose rhetoric on both sides doesn't help USD/CAD to perform in an orderly fashion.
"We are all sitting on pins and needles at this point and waiting to see what comes at the end of the moratorium on tariffs and to see whether or not the actions taken by Canada to address all the US concerns with respect to the northern border have been enough", said Bipan Rai, head of ETF and structured solutions strategy at BMO Global Asset Management.
Meanwhile, the recent minutes of the Bank of Canada (BOC) policy decision revealed that the central bank was extremely concerned about the economic impact of a trade war, which may prompt it to cut interest rates faster than anticipated.
USD/CAD was falling during the Asian and early European trading sessions. Today, traders should focus on another US inflation measure release, the US Producer Price Index report at 1:30 p.m. UTC. Higher-than-expected results may temporarily boost USD/CAD but are unlikely to break the general bearish trend.