A sense of caution enveloped financial markets on Thursday as investors awaited US data expected to offer more clues on inflation, economic growth and the outlook for monetary policy.

European markets are mixed while US futures are slightly lower amid cautious trade. It is shaping up to be another week that has been heavily influenced by inflation expectations with comments from several Federal Reserve officials impacting markets. While most members have repeatedly stated that the recent pickup in inflation would be transitory, taper talks may be gathering momentum.

Fed Governor Randal Quarles signaled on Wednesday that he was open to taper talks, echoing similar comments by Vice Chair Clarida on Tuesday who indicated that the Fed may start “talking about talking about tapering.” Growing expectations over the Federal Reserve moving closer to discussing the reduction in bond purchases could dampen the market mood and hit stock markets.

US data in focus – Core PCE main course

After today’s slew of economic data, the main course for the week will be the core PCE report on Friday which is the Fed’s favoured measure of inflation and comes without the volatility caused by movements in food and energy prices. Markets expect the headline number to have risen by 2.9% year-on-year in April, its strongest annual rise since 1993. If this report meets or exceeds expectations, it could compound the inflation fears and speculation over the Federal Reserve acting sooner rather than later.

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Commodity spotlight – Gold

Gold prices have edged lower today after failing to secure a daily close above the psychological $1900 level. Regardless, the precious metal remains supported by a softer dollar, inflation fears and real yields remaining in deeply negative territory. Given how concerns linger over rising inflationary pressures, what better hedge against inflation than gold? The precious metal remains bullish on the daily charts with a strong weekly close above $1900 opening the path to $1927 and $1959 respectively. Should $1900 prove to be reliable resistance, a technical pullback towards $1870 could be on the cards.

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