The international gold market witnessed a notable increase on December 23rd, as subdued inflation data from the United States stirred renewed optimism on monetary policy easing by the Federal Reserve in the coming yearThe spot price of gold rose by 0.13% to approximately $2,625, marking its third consecutive day of gainsEarlier in the day, it peaked at $2,633. This uptick came on the heels of a sharp decline that saw gold prices drop to an 11-week low following hawkish comments from the Fed last Wednesday.

As the market settled on Monday, the US dollar remained stable, indicating the impact of inflation data which showed only a moderate rise over the past month, alleviating some fears regarding potential rate cuts in the upcoming yearInvestors reacted positively to the passing of a spending bill by Congress over the weekend, effectively averting a government shutdown which further bolstered market sentiment.

The expectation shift regarding rate cuts has helped maintain the dollar index around 107.78, near the two-year high of 108.54 that was recorded on Friday

As the year-end approaches, trading volumes are expected to wane due to the holiday seasonObservers noted that the market exhibited minimal movement; this reflects traders' lack of interest in pursuing opportunities activelyThis period often presents challenges in interpreting market trends, with volatility increasing due to thin liquidity.

Currently, the dollar appears poised to conclude the year on a strong note, benefitting from the Fed's recent hawkish stanceTechnically speaking, the dollar finds itself in a favorable position as holiday trading beginsUnless there is a significant news event, market sentiment is likely to hold steady into the new year, suggesting that fluctuations in the current week could be negligible, primarily influenced by liquidity issues.

The Federal Reserve's prediction of a cautious approach to rate cuts last week surprised many in the market, driving up US Treasury yields and bolstering the dollar’s strength, while also casting shadows over other economies, especially emerging markets

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However, the inflation metrics favored by the Fed revealed a modest month-over-month increase in prices, showcasing the smallest rise in the core inflation index in six monthsThis information has eased fears about aggressive rate cuts potentially materializing as early as 2025.

Ajay Kedia, director at Mumbai's Kedia Commodities, remarked, “We have entered holiday mode, and gold is primarily supported by short covering, a trend that commenced last Friday, alongside some technical backing.” There seems to be a consensus that the gold market is being influenced by various overlapping factors, such as easing inflation fears and traders adjusting their investment strategies amid fluctuating economic signals.

Vasu Menon, managing director of investment strategy at OCBC Bank, echoed sentiments regarding the Fed’s shift in policy which has resurrected the specter of inflation, a factor that might keep investors on edge

Menon stated, “Should US inflation prove more stubborn than anticipated in the coming months, particularly in light of a firmer stand from the Fed, it could trigger heightened market volatility.”

On Friday, gold prices gained 1% as the dollar and US Treasury yields softened, presenting a favorable backdrop for the precious metalDissolving inflation concerns combined with strategic positioning by traders has fostered a conducive environment for gold recovery.

The latest data showed that inflation in November had decelerated after several months of stagnationThe Fed's preferred inflation gauge, the Personal Consumption Expenditures price index, rose by only 0.1% in November after an unrevised increase of 0.2% in OctoberYear-on-year, the PCE index increased by 2.4%, slightly lower than the market's projected 2.5%, yet still a boost from October’s figure of 2.3%.

Insightful commentary from Mary Daly, president of the San Francisco Fed, alongside two other officials, highlighted a perception that the central bank could resume easing policies next year, albeit with caution, due to the completion of the "recalibration phase." High interest rates have diminished the attractiveness of non-yielding assets like gold, making precious metal pricing highly sensitive to changes in monetary policy.

In a broader market context, traders appear to have clearer expectations regarding interest rate trends for the coming year

Predictions suggest that the Fed might lower rates by 38 basis points next year, notably below the central bank's prior estimate of two 25 basis points cuts projected just a week agoReflecting on September’s outlook when the Fed anticipated four rate cuts by 2025, the situation has become tumultuous, with current market pricing indicating that the first easing might be pushed back to June.

Moreover, data from the week ending December 17 revealed that COMEX gold speculators reduced their net long positions by 16,251 contracts, bringing the total down to 203,937 contractsThis adjustment might suggest a shift in market sentiment, potentially influenced by the prevailing uncertainties surrounding inflation dynamics and upcoming policy decisions.

As the market navigates these intricate dynamics, the interplay between inflation data, Fed policy, and global economic conditions will remain critical in shaping investor sentiment and driving future movements in both the gold market and the broader financial landscape.