(Kitco News) - The gold market is testing resistance around $2,050 an ounce, supported by cooling producer inflation pressures.
The Producer Price Index (CPI) fell 0.1% last month after November's revised decline of 0.1%, the Labor Department said on Thursday. The latest inflation data was slightly cooler than expected as economists looked for another unchanged reading.
"The December decrease in the index for final demand is attributable to a 0.4-percent drop in prices for final demand goods," the report said.
The report noted that in the last 12 months, producer inflation rose 1.0%, down sharply from consensus estimates for a 1.3% annual increase.
Meanwhile, core PPI, which strips out volatile food and energy prices, was unchanged for the third consecutive month. For the year, Core PPI increased 1.8% in the same period, below the November reading and analysts' estimates of 2% and 1.9%, respectively.
The gold market is seeing some renewed momentum in its initial reaction to the latest inflation data as it supports expectations that the Federal Reserve has room to ease interest rates earlier than expected. Spot gold last traded at $2,055.50 an ounce, up 1.35% on the day.
"This will harden some traders' belief that lower inflation is only a matter of time," said Adam Button, chief currency strategist at Forexlive.com.
Economists pay close attention to producer prices as they are seen as a leading indicator. Falling wholesale prices mean companies are less pressured to pass on higher costs to their customers.
Helping to support gold's bullish momentum is a solid rise in market expectations for a rate cut as early as March. According to the CME FedWatch Tool, markets see a more than 80% chance of the Federal Reserve lowering the Fed Funds rate in March.
