Gold prices experienced a decline in Asian trade, extending losses from the previous session as the release of stronger-than-expected U.S. labor data prompted a reconsideration of expectations for early interest rate cuts.
The precious metal faced a sluggish start to 2024, mirroring a significant rebound in the dollar as traders scaled back expectations that the Federal Reserve (Fed) might reduce rates as early as March.
This sentiment was further influenced by robust nonfarm payrolls data released on Friday, indicating resilience in the labor market and providing the Fed with increased flexibility to maintain higher interest rates for an extended period.
Gold also witnessed significant profit-taking following a robust performance in December, where the yellow metal concluded the year with over a 10% gain.
In the latest session, spot gold declined by 0.5% to $2,035.69 per ounce, while gold futures expiring in February dropped by 0.4% to $2,042.25 per ounce by 00:00 ET (05:00 GMT). Both instruments registered losses of approximately 0.9% during the first week of 2024.
Attention in the markets has now shifted towards the upcoming release of crucial U.S. Consumer Price Index (CPI) inflation data for December, scheduled for Thursday. This data, following the strong payrolls report, is anticipated to reveal an uptick in inflation compared to the previous month.
The trajectory of inflation is closely monitored by market participants, as it plays a pivotal role in shaping expectations regarding potential interest rate cuts by the Fed. The central bank had previously emphasized that signs of persistent inflation and strength in the labor market could deter early rate cuts.
Traders have adjusted their expectations, with the CME Fedwatch tool indicating a reduction in the probability of a 25 basis point cut in March. The probability dropped to around 63%, down from over 73% in the previous week.
The likelihood of higher interest rates for a more extended period is anticipated to exert near-term pressure on gold. Although expectations for a rate cut by the Fed persist later in the year, analysts at ING have postponed their predictions, now anticipating a cut in May instead of March.
The influence of higher interest rates on gold is attributed to the increased opportunity cost of investing in the precious metal, which yields no interest.
In contrast, copper prices showed a modest rise on Monday after experiencing a sharp decline in the first week of 2024. Copper futures for March delivery increased by 0.3% to $3.8128 per ounce, following a 2.2% loss in the previous week.
Copper prices were impacted by a robust dollar and weak purchasing managers’ index data from several major economies, particularly China. Traders are closely monitoring upcoming economic indicators from China, including inflation and trade data scheduled for release this Friday. Chinese copper imports will be a focal point for traders assessing the performance of the red metal.