Major market movements are imminent! The Fed's preferred inflation indicator is coming.

Spot gold closed at $1850.43 an ounce on Thursday (February 25), down $2.66 or 0.14%. Intraday high reached $1854.19 an ounce, and low reached $1840.36 an ounce.

　　The dollar continued to struggle after the release of the minutes of the Federal Open Market Committee (FOMC) meeting. With the market taking a moderate stance on the minutes, the dollar index traded near its daily low of 101.768.

　　Although the minutes of the May Fed meeting showed further 50 basis point rate hikes in June and July, investors pulled out of the dollar as observers believe the Fed will slow its tightening cycle later this year.

　　The minutes showed that a majority of participants at the May FOMC meeting believed that a 50 basis point rate hike at the June and July policy meetings would be appropriate to combat inflation. They considered inflation a key threat to the performance of the US economy. Furthermore, many board members believed that rapidly tightening monetary policy would allow the central bank to assess the effects of the tightening later in the year.

　　 Nobody really knows how far rates have to go.

　　 "We disagree with the market's dovish view of the minutes," argued analysts at Brown Brothers Harriman.

　　Following the release of the FOMC minutes, the dollar weakened and US Treasury yields fell. In our view, the views expressed in the minutes are all they could express at the start of an aggressive tightening cycle, in which nobody really knows how much further rates need to go. The Fed faces a very complex situation, so it is trying to embellish its hawkish stance while trying not to pre-commit to any rate path. The minutes clearly reflect this balance.

　　Earlier this month, the dollar index hit a near 20-year high above 105, but there are signs that the Fed's aggressive actions may have slowed economic growth, prompting traders to reduce tightening bets and US Treasury yields to fall from multi-year highs.

　　Meanwhile, in contrast, data released on Thursday showed that the number of initial jobless claims in the US fell last week, indicating that the labor market remains tight. However, this decline partly offset some of the increase in the previous week, which had pushed initial jobless claims to their highest level since January.

　　Other data released on Thursday also showed that the US economy contracted in the first quarter, affected by a record trade deficit and a slightly slower pace of inventory accumulation than in the fourth quarter. According to the second estimate from the Bureau of Economic Analysis, US real gross domestic product (GDP) fell at an annual rate of 1.5% in March, lower than the initially estimated contraction of 1.4%.

　　 Looking ahead, the US will release data on personal income and spending for April, the Fed's preferred inflation gauge, the core PCE price index, and the final reading of the University of Michigan consumer sentiment index for May on Friday.

　　In addition to the data, the market is also concerned about the slowdown in China's economic growth and the risks to energy security in Europe, which could boost safe-haven demand for the dollar. Analysts at Rabobank said: "In an environment where the Fed and other central banks are reducing liquidity, we expect higher volatility in the foreign exchange market."

　　 Gold's Future Outlook

　　FXStreet wrote that gold remains near the 200-day moving average entry point of $1850. In any case, the improving risk appetite currently puts gold at a disadvantage.

Spot gold hit a high of $1870 earlier this week, but its weekly gains have fallen from around 1.2% to around 0.2%.

　　But if gold bulls believe that the Fed's hawkish bets will continue to decline in the coming weeks, leading to further weakening of the dollar and US Treasury yields, then the recent pullback could be a good opportunity for them to increase long positions.

　　 If Friday's US April core personal consumption expenditure report fuels the narrative that US inflation has peaked, the report could lead to further reduction in bets on the Fed further tightening monetary policy, and gold could very likely return to the high levels in the $1870 area by the end of this week.