By Rania Gule Market Analyst at XS.com

The price of gold (XAU/USD) rebounded from its weekly low of $2013 to reach $2038 during early Friday trading hours. However, I believe the upward trend in gold prices may be limited due to the possibility that the Federal Reserve may not start lowering interest rates early this year as expected. This could lead to some selling pressure on prices.

At the same time, the U.S. Dollar Index (DXY) rose to 102.31 points, and U.S. Treasury yields increased, with the 10-year yield reaching 3.97%. This added negative pressure on prices and slowed down the strength of the current upward trend.

Yesterday, the U.S. inflation report came in higher than expected. The U.S. Consumer Price Index for December rose to 3.4% every year, up from the previous reading of 3.1% and better than the expected 3.2%. Monthly, the core Consumer Price Index rose by 0.3% compared to the previous 0.1%, surpassing expectations at 0.2%. The core CPI, which excludes volatile food and energy prices, also rose by 3.9% yearly in December, compared to estimates of 3.8%.

On the geopolitical front, after weeks of attacks on ships in the Red Sea by Houthi rebels in Yemen, disrupting global shipping, the United States and the United Kingdom conducted airstrikes late yesterday on Houthi targets in Yemen, hitting radar installations, storage sites, and missile launch platforms. The Western retaliation occurred even after Houthi leader Abdul-Malik al-Houthi promised a “major” response if the U.S. and its allies took military action against his group.

From my perspective, the U.S. is likely to take further measures to protect its interests and ensure freedom of international trade. The increasing geopolitical tensions may lead investors towards the traditional haven, potentially raising the likelihood of a gold price increase in the short to medium term.

Especially as the U.S. dollar returned to the red zone after a short rise following higher-than-expected U.S. Consumer Price Index (CPI) data. However, the markets still anticipate a roughly 70% chance of a rate cut by the Federal Reserve in March.

Concerns are also growing about the slowing Chinese economic recovery and increasing geopolitical risks, which could increase the chances of a recession in the United States. This could prompt the Federal Reserve to maintain a cautious tone regarding its future monetary policy. This comes after the latest data from Chinese customs on Friday showed that China’s exports declined last year for the first time since 2016, confirming the prevailing economic concerns in the markets.

In my view, the movement of the dollar index will also remain weak due to the absence of plans to prevent a government shutdown next week. A dispute over spending has emerged between the far-right Republicans in the House of Representatives, while Congress began leaving Washington on Thursday for a long weekend. This helps gold prices stay positive.

From my perspective, the next indicator to watch for gold price movement is the U.S. Producer Price Index (PPI) data and statements from Federal Reserve officials in the medium to long term. Geopolitical developments will be the main focus in the short term and before the weekend.