Daily Market Analysis by ForexMart

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Inflationary explosion in the US: how do the dollar and bonds react?

The consequences of high inflation are felt across the financial market. Specifically, the main Wall Street indices reacted to this news with a decrease after the publication of data indicating a higher than expected rise in consumer prices. This event pressured the expectations regarding the imminent lowering of interest rates, which in turn led to an increase in the yield of US Treasury bonds.

Among other things, the Dow Jones Industrial Average recorded its most significant drop in almost 11 months after the US Department of Labor's report showed an unexpected increase in consumer prices in January, especially due to the rise in housing costs.

Against this backdrop, market indices, which were on the rise in anticipation that the Federal Reserve System (FRS) would begin to lower rates as early as May, showed negative dynamics. The S&P 500 index, for example, closed above the 5000 point mark for the first time, and the Dow Jones index traded near record-high values. However, the publication of inflation data revised expectations regarding the FRS's policy, increasing the likelihood that rate cuts may not occur until June.

Mega-cap companies sensitive to rates, such as Microsoft, Alphabet, Amazon.com, and Meta Platforms, showed a decrease in stock prices amid the rise in yields of US Treasury bonds to a two-month high. A similar situation was observed among chip manufacturers, including Micron Technology, Qualcomm, and Broadcom, which led to a 2% drop in the Philadelphia SE Semiconductor index.

The real estate, consumer discretionary, and utilities sectors faced the most significant losses among the 11 major industry indices of the S&P 500, especially real estate, which reached its lowest values in more than two months.

Small-cap companies also felt the pressure, with the Russell 2000 index showing the most significant daily drop since June 2022.

"Various statements by Federal Reserve System officials in recent weeks have indicated that the market-anticipated rate cuts in the first half of the year might have been premature. The latest consumer price index data certainly confirms this trend," commented Bob Elliott from Unlimited Funds.

The consumer inflation data followed a modest revision of inflation figures for the last quarter of 2023, giving investors temporary relief regarding inflation expectations.

The Cboe Volatility Index reached its highest level since November, highlighting the growing market concern. The S&P 500 and Nasdaq Composite indices lost 1.37% and 1.79% respectively, while the Dow Jones Industrial Average fell by 1.36%, marking its most significant decline since March 2023.

Among other developments, JetBlue Airways shares surged by 21.6% after Carl Icahn disclosed his stake in the company, calling the shares "undervalued." Arista Networks' shares declined by 5.5% following a gross profit forecast below expectations, and Marriott International lost value after forecasting annual earnings below analyst expectations.

Cadence Design Systems and toy manufacturer Hasbro also faced a drop in share value after publishing gloomy forecasts. Meanwhile, Tripadvisor shares jumped by 13.8% following the announcement of the creation of a special committee to review deal proposals.

The total trading volume on US exchanges reached 12.9 billion shares, comparable to the average of the last 20 sessions at 11.71 billion shares.

The US stock market continues to demonstrate record levels, supported by leading technology companies and expectations of Federal Reserve rate cuts. The global stock index MSCI and the Stoxx 600 European index also showed a decline amid current events.

The dollar index reached a three-month high, and bitcoin set a new record since December 2021, despite subsequent declines.

Data on US retail sales and the producer price report are expected shortly, which may further influence market sentiments.

The rise in oil prices continues amid tensions in the Middle East and Eastern Europe, with Brent crude futures and West Texas Intermediate showing significant increases. Meanwhile, gold prices fell below the key level of $2000 per ounce after the CPI data was released, reaching a two-month low.

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XAU/USD: review and analysis

The positive factor for raw materials currently lies in the fact that the dollar bulls are awaiting important economic events regarding the path and timing of the Federal Reserve's interest rate reduction. This week, the FOMC minutes will be published, which is expected to contribute to some impulse in the precious metal.

Also, a decent increase in Treasury bond yields provides some support for the U.S. dollar and limits the rise of the non-yielding yellow metal. In addition, the overall positive tone in the stock markets contributes to restraining the global increase in the price of gold.

And since yesterday was a holiday in the United States, there were no significant movements in the markets. From a technical point of view, any upward movement is likely to encounter some resistance near the $2,030 level, where the 50-day SMA is located, with subsequent testing. If this level is decisively surpassed, it will create a foundation for further growth beyond the intermediate barrier at $2,044–2,045 towards the supply zone at $2,065.

On the other hand, the 100-day SMA, currently around $1,992–1,991, may act as immediate support before the $1,983 region or the two-month low reached on Wednesday. Following this is the 200-day SMA, currently tied to the $1,965 area, and in the case of a decisive breakthrough, it will be considered a new trigger for the bears.

After that, gold may accelerate its decline to the November 2023 low, with some obstacles along this path.

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2025: Gold and oil raise rates

In Asian markets on Tuesday, gold prices remained within a narrow range amid fears of long-term interest rate hikes. The absence of trading signals was also due to a holiday in the American market.

Gold demonstrated some strengthening, reaching the $2000 per ounce mark after recovering from a two-month low over the last two trading sessions. However, current fluctuations in gold prices are still occurring within the range of $2,000-$2,050, which was established for the majority of 2024.

Spot gold prices increased slightly by 0.1% to $2,019.17 per ounce, while the price of gold futures expiring in April settled at $2,030.20 per ounce as of 23:34 Eastern Time.

Analysts from Citibank highlight three main catalysts that could push gold prices to $3000 per ounce and oil to $100 per barrel in the next 12-18 months. Among them are a sharp increase in gold purchases by central banks, stagflation, and a deep global recession. Currently, gold is trading around the $2016 mark and could rise by approximately 50% in the event of any of these scenarios materializing.

Analysts point to dedollarization in central banks of developing countries as the most likely path to reaching $3000 per ounce of gold. This would lead to a doubling of gold purchases by central banks and shift the focus of demand from jewelry to gold as the main driver.

Central bank gold purchases have reached record levels in recent years, aiming to diversify their reserves and reduce credit risk. Leading this trend are the central banks of China and Russia, as well as India, Turkey, and Brazil, actively increasing their gold bullion purchases. According to the World Gold Council, global central banks have maintained a level of net gold purchases exceeding 1000 tons for two consecutive years.

In the context of a global recession, a deep economic downturn could force the United States Federal Reserve to drastically cut rates, which, in turn, could be the reason for gold prices to rise to $3000. Gold traditionally exhibits an inverse correlation with interest rates, becoming a more attractive asset compared to fixed income in a low-rate environment.

Stagflation, combining high inflation with economic slowdown and rising unemployment, could also trigger a rise in gold prices, despite the low likelihood of such a scenario. Gold is perceived as a safe haven in periods of economic instability, attracting investors looking to avoid risks.

In addition to the above factors, Citi suggests that the baseline scenario for gold involves reaching a price of $2150 per ounce in the second half of 2024, with an expected average price just over $2000 per ounce in the first half of the year. Record prices may be achieved by the end of 2024.

Although geopolitical tensions in the Middle East provide support for gold prices, a more significant price increase is restrained by the prospect of long-term interest rate hikes in the US.

Traders are lowering expectations regarding the Federal Reserve's imminent rate cuts following reports of high inflation in the US, and statements from Fed officials reinforce assumptions about maintaining high interest rates over a longer period.

The outlook for gold in the near future remains uncertain, similar to the situation in the market for other precious metals. Prices for platinum and silver show a decline, and copper experiences a slight drop in price, despite a reduction in the base interest rate in China, the largest importer of the metal.

In the context of the oil market, analysts consider a scenario where oil prices could once again reach $100 per barrel, considering risks associated with geopolitical tensions, actions by OPEC+, and possible supply disruptions from key oil-producing regions. Tensions in the Middle East, particularly the conflict between Israel and Hamas, and increasing tension on the border between Israel and Lebanon highlight potential risks for oil suppliers in the OPEC+ region.