In Thursday trading, US Treasury yields fell after US inflation data met expectations and market participants' focus turned to further comments from Federal Reserve officials regarding signs of interest rate cuts. Gold prices reached their highest level in a month.

The US Commerce Department's Bureau of Economic Analysis reported that PCE inflation rose 2.4% on an annualized basis (year-on-year) and reached 0.3% month-on-month (month-over-month) in January. -over-month) in January. On a monthly basis, it was higher than the 0.1% increase in December 2023, but on an annual basis it was lower than the 2.6% increase in December 2023.

This figure was also in line with market expectations that PCE inflation would increase by 0.3% (m/m) and 2.4% (y/y). Meanwhile, core PCE inflation, excluding fluctuating food and energy prices, returned to 0.4%, in line with market expectations. The slowdown in PCE inflation has increased expectations that the Fed will cut interest rates soon.

The PCE inflation data was in line with expectations, and although the market is starting to take a breather, conditions are still considered quite challenging. The yield on 10-year US Treasury bonds in yesterday's trading was 4.27%, down from 4.32% in the previous trading session.

"If PCE inflation is 0.4% this month (January), we will see a rate cut closer to June," New York-based independent metals analyst Tai Wong told Reuters. Gold is traditionally considered a hedge against inflation, however when interest rates rise to dampen price increases, investing in bullion is not recommended as bullion does not earn interest. The market currently estimates a 62% probability that the Fed will cut rates by June 2024, according to the CME FedWatch tool.

Earlier this week, Fed officials said a rate cut is possible and likely before the end of the year. David Mager, director of metals trading at Highridge Futures, told Reuters: "The steady stream of Fed talk suggests there is no rush to cut rates and this news was already priced in by the market. "Indeed it has," he said.

"Any change that leads to the idea of a slightly faster rate cut would be positive for gold," Major added. Gold prices are highly sensitive to movements in US interest rates. When US interest rates rise, the US dollar and US Treasury yields rise. This situation is not good for gold, as a strong dollar makes buying gold more difficult and reduces demand. Gold is also non-yielding, so rising US Treasury yields make gold less attractive.
 

However, lower interest rates reduce the yield on the US dollar and US Treasuries, thereby reducing the opportunity cost of holding gold. This makes accumulating gold more enjoyable.