Gold prices wait for PCE to clear the clouds and see the sun, beware of low liquidity before the festival to amplify fluctuations

On Friday (December 21), as the year-end holiday approached, market trading was light, the US dollar and US bond yields were under pressure, and gold continued to fluctuate in a narrow range around $2,035, waiting for the release of the main event of the week - the US PCE price index. Before that, the market's expectations for the Federal Reserve to cut interest rates were suppressed by many officials, which also made the Fed's true attitude ambiguous, and investors looked forward to more data to "clear the clouds".

Gold prices rose on Thursday, helped by a weaker dollar and lower U.S. Treasury yields, as traders focused on U.S. economic data for more clues about the outlook for the Federal Reserve's monetary policy.

Benchmark U.S. 10-year Treasury yields are hovering near a five-month low hit on Wednesday after U.K. inflation fell to its lowest level in more than two years in November.

The dollar fell 0.1% against other currencies, making gold less expensive for holders of other currencies.

Low liquidity or amplified fluctuations before the holiday

The dollar was less volatile amid light holiday trading, with the dollar index holding steady at 102.40, down 1 per cent so far this year, ahead of the release of the last major US inflation data for the year on Friday.

Given that the dollar has been weak for weeks and markets have digested expectations of a 150 basis point rate cut by the Federal Reserve in 2024, caution has temporarily prevented further dollar selling.

"Before [this] event, some position adjustments and risk reduction... that is sensible," said Christopher Wong, FX strategist at OCBC in Singapore. "Liquidity is becoming thinner as the festive season approaches and the thin liquidity could exacerbate price volatility due to any unexpected data."

Wednesday's heavy sell-off in the final hour of Wall Street stock trading also sent ripples through the market in risk aversion, even as U.S. stock futures stabilized on Thursday.

The market focuses on the Federal Reserve

"Gold remains supported by the outlook for a global rate cut cycle, primarily in the US," said Kyle Rodda, analyst at Capital.com Financial Marekt.

"From a technical point of view, prices have lost momentum; gold is at risk of a short-term pullback, especially given recent opposition from Fed officials to the prospect of rate cuts next year and the possibility of overbought bonds," Mr. Rodda said.

The dovish tilt of the Federal Reserve at its last policy meeting has prompted traders to expect several rate cuts in 2024, starting as early as March next year.

However, Fed officials have since resisted the idea of a rapid rate cut next year. Lower interest rates reduce the opportunity cost of holding non-yielding gold bars.

"Federal Reserve mouthpiece" Nick Timiraos said that Chairperson Powell suddenly "released pigeons" earlier, clearly stating that the Federal Reserve has begun to discuss interest rate cuts, but a number of regional Federal Reserve presidents have since passed on "hawkish" rhetoric to the market, the Fed's true attitude appears ambiguous, and the market feels confused.

Data released on Wednesday showed that U.S. existing home sales unexpectedly rose in November, and consumer confidence rose more than expected in December on optimism about the job market.

The focus now shifts to the third-quarter U.S. gross domestic product report and initial jobless claims due later today, while the much-anticipated November core personal consumption expenditure (PCE) index is due to be released on Friday.

Analysts expect a similar slowdown in core U.S. PCE data on Friday, with annual inflation slowing to 3.3 percent, the lowest level since 2021.