Investors are increasingly convinced that the Federal Reserve will maintain its current interest rates during its January meeting, according to the CME FedWatch tool, which indicates a nearly 98% probability of this outcome. The prevailing sentiment in the market is that as inflation continues to ease, the Fed may soon be compelled to cut rates. This anticipation has contributed to a rally in gold, with prices surging past the $2,700 mark. Meanwhile, a recent drop in U.S. Treasury yields, especially the 10-year yield, which has fallen below 4.70%, is further influencing market dynamics.
The December U.S. Consumer Price Index (CPI) painted a mixed yet optimistic picture of inflation. The headline CPI showed a slight acceleration, reaching 2.9% year-on-year, up from 2.7% in November. However, the core CPI, which excludes volatile food and energy prices, rose at a slower pace than anticipated, registering 3.2% annually, just shy of expectations of 3.3%. This data underscores the complexity of the inflation landscape as it signals both progress and ongoing challenges.
In response to these economic indicators, the probability of the Federal Reserve cutting rates by 25 basis points in June has increased significantly. Richmond Fed President Tom Barkin recently acknowledged that while there is progress towards reducing inflation, much work remains to achieve the Fed's target of 2%. This acknowledgment adds weight to expectations of future rate cuts.
The global economic outlook remains clouded by ongoing instability in regions such as Ukraine and the Middle East, coupled with concerns over potential tariff escalations. These factors contribute an additional layer of uncertainty that markets must navigate. The expectation of further rate cuts by the European Central Bank is also affecting currency dynamics, dragging down the Euro while the US Dollar finds its footing amid a cautiously optimistic market mood.
Gold's recent rally has been fueled by a key shift in market expectations regarding U.S. monetary policy. In light of softer inflation data and shifting investor sentiment, gold prices have continued their upward trajectory following a period of volatility. The RSI is sharply edging towards overbought territory, which may indicate a potential slowdown in gold's ascent.
In addition to these developments, UK Retail Sales for December declined unexpectedly, creating headwinds for the GBP/USD pair. This decline adds another dimension to the economic challenges facing global markets.