• Gold price recovers strongly as geopolitical tensions increase safe-haven appeal.
• The US Dollar remains upbeat ahead of US inflation data.
• Soft inflation data would impact the interest rate outlook.

Gold price (XAU/USD) delivers a swift recovery as the appeal of safe-haven assets improves amid escalating Middle East tensions. The recovery move in the Gold price will be tested by the United States Consumer Price Index (CPI) data for January, which will be published at 13:30 GMT. The consensus shows that price pressures are expected to have softened as the Federal Reserve (Fed) has been holding interest rates in the range of 5.25%-5.50% for longer. 

The inflation data will significantly impact the outlook for interest rates. Softer inflation would be positive for Gold as it makes it more likely interest rates will fall, lowering the opportunity cost of holding Gold, which is non-yielding. 

The Fed has been consistently pushing back expectations of aggressive rate cuts in 2024, believing that achieving its dual mandate (2% core inflation and full employment) remains out of sight. 

Labor demand in the US has remained robust and the scale of economic activities is improving significantly despite higher interest rates. Fed policymakers demand more evidence to ensure price stability as it is crucial for achieving the dual mandate before the commencement of the rate-cut campaign. Softer-than-expected inflation data would uplift hopes of rate cuts. 

Easing price pressures would build significant pressure on the US Dollar and bond yields, further supporting Gold since it is priced in US Dollars. Investors will take out liquidity from the US Dollar in a case of decelerating inflation data, as this would allow the Fed to roll back its hawkish interest rate stance