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Gold Retreats Ahead of Key US CPI Data, amid US Dollar and Bond Yields Holding Steady at Multi-week Highs

GOLD PRICES range-bound ahead of the US inflation data report to be published this coming Tuesday that could define the outlook for global interest rates, amid the US dollar and the US 10-year bond yields firming to 5-week highs.
Spot gold edged lower 0.2% to $1862, after finishing last Friday at the same level as the previous week’s close, the lowest in 5 weeks.
The Dollar index – a measure of the US currency's value versus its major peers – edged higher to its highest since 6th January 2023
Ten-year US Treasury yields – a benchmark rate for government as well as many finance and commercial borrowing cost – firmed at 3.7%, the highest since 3rd January 2023.
The yield on the interest rate sensitive US 2-year treasury is back above 4.5%, the highest since November 2022, as investors’ bet that the Federal reserve will keep monetary policy tight for longer ahead of the release of US consumer price data on 14th February.  
Consumer price index for all US Urban consumers v Effective federal funds rate
" This week’s US CPI is one of the most pivotal prints in recent memory," stated a Barclays analyst in a note.
Economists polled forecast a 0.4% increase in the January CPI, which would slow the year-on-year rate to 6.2% from 6.5% in December, declining 6 months in a row.
Year-on-year CPI peaked at a roughly 40-year high of 9.1% in June 2022.  Core CPI, which excludes volatile food and energy prices, is expected to rise 0.3% in January 2023, with the year-on-year rate at 5.4% versus 5.7% in December 2022.
"The dollar has rallied on the back of US labour market strength, but the evolving narrative is set to be updated yet again on Tuesday," said the Barclays analyst note, pointing out that the market has adjusted its expectations for Fed funds rate higher after the January US jobs data blew past analysts forecast.
“Change in this trend could be this Tuesday's CPI,” agreed Bruce Ikemizu, chief director of Japan Bullion Market Association in the latest note.
“The disinflationary trend is expected to continue, in which case gold prices will be supported at the $1800-1850 level, and if the CPI drops below 6.2%, gold will rise again.”
Markets are pricing in a 91% probability that the Fed will raise interest rates by another 25 basis points to a range of 4.75% to 5.0% in the next meeting and over 80% probability to raise a further 25 basis points from 5.0% to 5.25% in May, increasing from a chance of 35% one month ago, according to the CME FedWatch tool.
Philadelphia Fed President Patrick Harker, a voting member of the rate-setting committee, on Friday said he saw the Fed’s policy rate going up to somewhere above 5% and holding there for a while and flagged the prospect of rate cuts in 2024.
"At this point, we can go at a pace of 25 (basis-point rate hikes) and get inflation under control without doing undue damage to the labour market," Harker said, adding that moving to smaller rate increases is a "risk management" issue for the Fed.
Gold priced in Euros meantime edged lower 0.3% to €1743 while the UK gold price in Pounds per ounce fell 0.5% to £1540.
Gold prices for Japanese investors rose 0.7% to ¥7938 per gram, as the Japanese Yen in FX markets slid further as traders reassessed their expectations of the policy stance of the likely new Japanese central bank governor, who is due to be officially announced on Tuesday.  
Japan’s government is likely to recommend economist Kazuo Ueda as the next Bank of Japan (BOJ) governor, media reports said last Friday, four days after it was reported that Deputy Governor. Masayoshi Amamiya had been the government’s pick.
The yen and bond yields initially rose on the news, which fuelled bets Ueda could end super-low interest rates sooner than if top contender and dovish Amamiya had got the job.
In an interview on the same day, Ueda however said it was appropriate for the BOJ to maintain its current ultra-easy policy.
The central bank maintained its key short-term rate at an ultra-dovish minus 0.1% and the 10-year Japanese Government Bonds yield around 0% in the recent meeting in January.
Japanese inflation hit 4% in December 2022 – which is double the BOJ’s 2% target – Haruhiko Kuroda, whose second term ends this coming April, has argued it is too early to tell if price rise will be sustainable. 
Asian stock markets fell as MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.7%, after losing 2.2% last week.  Japan’s Nikkei also was down 1.0%, following 0.6% decline during the previous week.
European stocks were muted on Monday morning as the pan-European Stoxx 600 index was up 0.6%, after finishing 1% down on Friday with UK preliminary fourth-quarter gross domestic product figures showing the economy narrowly avoided recession, in line with consensus forecasts.
US stock futures were slightly higher Monday, following the S&P 500′s and Nasdaq Composite’s worst weekly performance in nearly two months.
“The risk, however, is that premature easing in financial conditions, and in turn, a pickup in growth expectations, may be counterproductive from an inflation fighting point of view,” said Emmanuel Cau, analyst at Barclays, looking back on last week as several Fed speakers pushed back on Powell’s dovish talk, following the hot January payrolls report. 
“As a result, the disconnect between the Fed’s own rates forecasts and market pricing has noticeably narrowed, which has hurt US equities.”

Atsuko Whitehouse is the Head of the Japanese Market at BullionVault and the Editor of Japanese GoldNews.

See all articles by Atsuko Whitehouse here.

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