What’s Ahead for Gold Prices, the US Dollar and Stocks?

US CPI PREVIEW – GOLD, US DOLLAR, STOCKS

• The February’s U.S. inflation report will steal the spotlight on Tuesday morning
• Any deviation of the official data from market expectations could trigger volatility
• This article discusses possible scenarios for gold, the U.S. dollar and stocks

Most Read: US Dollar Gains Before US Inflation, Volatility Ahead – Setups on EUR/USD, USD/JPY

Tuesday marks an important day for investors of all stripes as the U.S. Bureau of Labor Statistics is set to release the February’s consumer price index survey, a key report that is anticipated to provide fresh insights into recent inflation dynamics and guide the Federal Reserve’s near-term monetary policy outlook.

In terms of projections, headline CPI is forecast to have risen 0.4% last month, bolstered by higher energy costs. This result would have kept the annual rate unchanged at 3.1%. Meanwhile, the core gauge is seen increasing 0.3% m-o-m, leading to a minor downshift in the year-over-year reading to 3.7% from the previous 3.9%.

US INFLATION TREND

Source: BEA

MARKET EXPECTATIONS – US CPI

Source: DailyFX Economic Calendar

Focusing on the market response, official figures that closely align with Wall Street’s consensus estimates wouldn’t generate much volatility or alter sentiment in a meaningful way, but any large deviation in the CPI data relative to what’s priced-in could trigger large price swings across assets. For this reason, traders should closely track the economic calendar tomorrow morning.

POSSIBLE SCENARIOS FOR KEY ASSETS

UPSIDE SURPRISE (HIGHER-THAN-EXPECTED CPI)

A hotter-than-expected CPI report would confirm that January’s upside surprise was not a one-off event, but an indication that inflation may be reaccelerating and will be harder to defeat. Such an outcome might compel the Fed to revise its PCE forecast upward and potentially reduce the number of rate cuts envisioned for the year at its March meeting.

This scenario should spark a hawkish repricing of interest rate expectations, pushing bond yields and the U.S. dollar higher. In response, gold prices and stocks could come under strong selling pressure.

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SUBDUED REPORT (LOWER-THAN-FORECAST CPI)

Cooler-than-forecast CPI readings would bolster the idea that last month’s data was an anomaly and that progress on disinflation continues. This could give the Fed greater confidence that inflation is on a sustained path towards the 2.0% target, validating the market’s outlook for multiple rate cuts in 2024 and the start of the easing cycle in June.

In these circumstances, we may witness further retracement in yields and the U.S. dollar in the days and weeks ahead. This could inject fresh bullish momentum into gold prices and risk assets.

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