January’s US annual inflation figures came in slightly above expectations at 3%, compared to the anticipated 2.9%. This resulted in a notable surge for the dollar across many currency pairs, particularly against the Japanese yen. This analysis will delve into the context of this inflation data and explore its impact on gold (XAU/USD) and the euro-dollar (EUR/USD) exchange rate.
For the fourth consecutive month, US inflation has risen, establishing a clear upward trend. Contributing factors in January include the first increase in energy prices in six months, alongside rising costs for used vehicles and transportation. This slightly higher-than-expected result aligns with the recent Non-Farm Payroll (NFP) report, which indicated a substantial increase in average hourly earnings.
Market sentiment appears to have anticipated this inflationary pressure, as the probability of a Federal Reserve (Fed) rate cut in June has decreased. CME FedWatch data reveals a 64% probability of maintaining the current 4.25-4.5% rate in June, a significant jump from 34% the previous week.
Furthermore, Federal Reserve Chair Jerome Powell’s recent testimony to the Senate Banking Committee reinforces the Fed’s patient stance. Powell emphasized the overall stability of the economy and highlighted the current funds rate being considerably lower than last year’s peak.
Considering the modest nature of the current inflationary uptrend and the Fed’s commitment to a cautious approach, the risk of a significant inflation resurgence seems relatively low. This environment generally supports the dollar and, conversely, exerts pressure on gold, despite the prevailing positive sentiment surrounding the precious metal.
Gold Retraces from Recent Peaks
The combination of higher inflation and a reduced likelihood of a Fed rate cut in the first half of 2025 has weighed on gold prices. However, overall sentiment toward gold remains remarkably strong, buoyed by dovish policies from other major central banks like the European Central Bank and the Bank of England, increased demand for safe-haven assets amid trade tensions, and potential geopolitical risks in the Middle East.
Gold’s impressive rally since the beginning of the year was due for a correction. With the price nearing $3,000 before the inflation data release, a pullback seemed likely. Overbought conditions have persisted since mid-January, even with exceptionally high buying volume in February.
While $2,900 doesn’t appear to be a significant support level yet, the price might find some footing around the 20-day Simple Moving Average (SMA) before potentially testing $2,800. Such a deep retracement seems somewhat unlikely given the current positive sentiment and strong demand. The $2,850 zone could emerge as a strong demand area, contingent on upcoming political developments. An immediate new high for gold is improbable under the current circumstances.
EUR/USD Shows Muted Response to Inflation Data
The euro-dollar experienced a modest decline following the slightly stronger-than-expected US inflation figures, but volatility remained relatively low. While expected central bank policies in the coming months generally favor the dollar, the impact of ongoing trade disputes remains uncertain.
With $1.02 and $1.05 acting as key support and resistance levels respectively, EUR/USD could be settling into a sideways trend, a common occurrence for major currency pairs. The slow stochastic indicator is closer to neutral than oversold territory, and Bollinger Bands show no signs of saturation.
Despite a significant spike in buying volume on February 3rd following the weekend gap, upward momentum was limited primarily to closing that gap. Market participants are now focused on upcoming European economic data releases, including German inflation, Eurozone-wide employment and GDP figures, and the ZEW Economic Sentiment Index on February 18th.
