Source: Golden Ten Data

At 21:30 Beijing time on Tuesday, the US will release the CPI data for January. Economists surveyed by foreign media expect that the US Department of Labor's monthly inflation report will show that overall consumer prices in January rose 2.9% over the same period last year, the smallest increase since March 2021.

They estimate that the core CPI will rise 3.7% year over year, the smallest increase since April 2021. However, this level is still far higher than the pre-pandemic level, especially the products most Americans often buy, such as groceries.

The pain of rising prices in the past may be part of the reason many Americans are still pessimistic about the economy. An analysis by Goldman Sachs economists suggests that disappointment with the high price level may be one of the reasons why the confidence index continued to be sluggish in the early 80s of the last century, even after a sharp decline in inflation. Goldman Sachs chief economist Jan Hatzius said:

“Consumer confidence appears to take some time to recover, in part because people are concerned about levels of inflation rather than changes.”

Inflation figures for recent months are lower than a year ago, and economists expect this to continue in January. They estimate that the seasonally adjusted overall price is 0.2% higher than the previous month, and the core price is up 0.3%.

The PCE price index from the Department of Commerce, which is favored by the Federal Reserve, will be released later this month. This indicator has always been lower than the Department of Labor's data. But even considering this fact, last month's CPI inflation rate may still be higher than the 2% target set by the Federal Reserve.

The anti-inflation process is “full of ups and downs”

Economists generally expect inflation to cool down this year, but they warn that this process may be full of ups and downs. For example, solving supply chain issues helped curb the prices of many products, while used car prices, which became a major source of inflation soon after the COVID-19 outbreak, have been falling recently. Judging by data from private suppliers and the Department of Labor's new tenant rent index, new rental prices have also cooled down over the past year.

On the other hand, Morgan Stanley economist Diego Anzoategui warned that inflation in some service prices could become tricky, which could put upward pressure on monthly price data. He said:

“We believe that in the first quarter of this year, the inflation rate will be slightly higher than the level of the past six months. In the second half of this year, we expect more anti-inflationary processes in the service sector.”

Bank of America said core inflation is still particularly difficult due to high housing prices and “unstable” categories such as used cars, transportation services, and lodging outside the home.

Bank of America economists Stephen Juneau and Michael Gapen wrote in a note to clients on Monday, “The good news is that we expect housing inflation to slow down this year, given the deflationary rate of rent inflation.”

When will interest rate cuts actually arrive?

Although the US CPI rate has always been higher than the Federal Reserve's 2% target. However, the Federal Reserve's favorite inflation indicator, the six-month annual rate of the core personal consumption expenditure price index (PCE), has fallen below this level, raising hopes that the Fed may start cutting interest rates.

Federal Reserve officials also believe that inflation may have been brought under control, which is an important reason why they expect to cut interest rates later this year. “As a result, we have six months of good inflation data,” Federal Reserve Chairman Powell said at a press conference after the Federal Reserve policy meeting two weeks ago.

But he added that Federal Reserve officials would like to see more evidence to “confirm what we have seen and to convince us that we are on a sustainable path.”

According to CME data, the market expects the probability that the Federal Reserve will keep interest rates unchanged in March is close to 85%. The market generally expects the Federal Reserve to start cutting interest rates at the May meeting. The probability is about 60%.

Bank of America does not expect the Federal Reserve to cut interest rates until June. The bank's economist said, “A report that meets our expectations will continue to strengthen the confidence of the Federal Reserve and support our expectations for the first rate cut in June.”

Federal Reserve officials also responded to Powell's cautious remarks. Cleveland Federal Reserve Chairman Meister said in a speech last week, “In the absence of sufficient evidence that inflation is on a sustainable and timely path back to 2%, it would be a mistake to cut interest rates too soon or too quickly.”

Minneapolis Federal Reserve Chairman Kashkari added that when it comes to dealing with inflation, the Federal Reserve “hasn't reached the end yet,” while Boston Federal Reserve Chairman Collins said she “needs to see more evidence” that inflation is moving closer to the Fed's 2% target.

Both Mester and Collins said interest rate cuts may come “later this year.” Gapen said, “They seem concerned that most of the reason the anti-inflation process is being blocked is falling commodity prices, and this situation may not continue.”

UBS chief economist Jonathan Pingle wrote in a forward-looking report on Friday, “The longer the FOMC waits to cut interest rates, the more likely it is that their determination to fight inflation will gain credibility. Of course, this strategy is also risky because inflation expectations are already lower than when the average inflation rate was 2%, and they are still relying on 'outdated' economic activity data.”

Some consumer pessimism about the economy appears to be fading. The New York Federal Reserve reported on Monday that in its monthly consumer survey, the percentage of respondents who think their family's financial situation will improve after a year rose from 30.6% in December last year to 34.1% in January, the highest level since September 2020. The survey also showed that consumers expect prices to rise 3% next year, the lowest level since December 2020. Pingle concluded:

“Overall, inflation appears to be falling faster than FOMC expected. The decline in inflation will be a 'macro theme' for the first half of this year.”

Is gold prone to a “bear squeeze”? The key to regaining upward momentum is...

Taking into account the words of the Federal Reserve officials, tonight, an upside accident could cause a greater reaction than a downside accident. The higher-than-expected CPI data would make the Fed's cautious remarks more credible.

TD Securities economists said that although strong employment reports may suggest that the Federal Reserve is in no hurry to begin easing monetary policy, fund managers have slightly increased their net exposure to gold. Currently, gold investors' positions are still at historically low levels, and interest in gold's open positions is still at the level before a sharp rebound. This highlights that at a time when Federal Reserve officials are considering starting a cycle of interest rate cuts, the asymmetry of gold has matured and is prone to substantial bearish squeeze.

FXStreet analysts said that the unexpected rise in US CPI data may reinforce the hawkish rhetoric of the Federal Reserve, thus triggering a new wave of sell-off in gold prices. On the other hand, weaker-than-expected data may revive the market's early expectations of interest rate cuts by the Federal Reserve and trigger a rebound in the recovery of this precious metal.

Currently, the price of gold has fallen below the upward trend line support level of 2024 US dollars. With technical breakthroughs, the $2,000 mark of gold will be tested, but until then, gold still has a static support level of 2010 US dollars.

If the selling pressure intensifies, the price of gold may fall below the $2000 mark and test the 1992 100-day simple moving average (SMA). The 14-day Relative Strength Index (RSI) is well below 50, indicating that gold buyers will face more pain.

Conversely, if the price of gold successfully holds the 2010 support level, the 2024 trend line support will turn into resistance. If it breaks through here, you can keep an eye on the 21-day moving average of $2027. Breaking through the 2033 moving average and the 50-day moving average may cause gold to regain upward momentum and look at $2,040 from faraway resistance.

Editor/jayden