Gold prices pulled back for a second consecutive day following Tuesday's historic peak, as investors digested higher-than-expected inflation data and Federal Reserve Chairman Jerome Powell's congressional testimony reinforcing a cautious approach to rate cuts.

The U.S. Bureau of Labor Statistics' January Consumer Price Index (CPI) report showed a 0.5% increase, surpassing both December's 0.4% rise and the consensus forecast of 0.3%. Core CPI, which excludes volatile food and energy prices, jumped 0.4% in January, double December's increase of 0.2% and above the consensus estimate which anticipated the rise of 0.3%.

During his second day of semi-annual congressional testimony, Powell maintained his stance before the House Financial Services Committee that the central bank would proceed slowly and deliberately with interest rate reductions this year. Speaking to the Senate Committee on Banking, Housing, and Urban Affairs, he emphasized that the Fed sees no urgency to cut rates given the economy's overall strength and inflation's persistent elevation above the 2% target.

Market expectations, as reflected in the CME's FedWatch tool, show a 97.5% probability that the Federal Reserve will maintain its current benchmark fed funds rate between 4.25% and 4.50%. Looking ahead to May's Federal Open Market Committee (FOMC) meeting, there remains an 86.8% likelihood of rates staying at current levels. Analysts at Saxo Bank project just one rate cut this year, anticipated at September's FOMC meeting.

Tuesday marked a milestone for gold as the April contract reached an unprecedented intraday high of $2,968.50. However, this peak proved unsustainable, with prices retreating to $2,907 before settling at $2,926.50. The downward pressure continued Wednesday, with gold fixing at $2,924.90 by 4:55 PM EST, representing a modest $2.00 decline. The dollar index showed minimal movement, rising just 0.03% to 107.98.

Notable market dynamics emerged as traders swiftly capitalized on the day's dip to $2,886.50, demonstrating strong underlying support for the precious metal. Aggressive buying pushed the April contract $38 higher by settlement, suggesting robust investor confidence despite the recent pullback from record levels.

The market's response reflects the fact that investors are laser focused on rising inflation as well as, monetary policy expectations. The net result is a continuation of the extreme bullish market sentiment by investors as they use gold’s long-standing and traditional role as a hedge against economic uncertainty. While Powell's testimony and the higher-than-expected inflation data have temporarily dampened gold's momentum, the rapid price recovery from intraday lows indicates sustained investor interest in maintaining gold positions amid ongoing economic uncertainties and geopolitical tensions.

Gold’s recovery from the intraday lows over the last two days clearly demonstrates that investors continue to support the safe have an asset as a primary tool to counteract persistent inflation pressures, and the Federal Reserve’s pivot to a much more hawkish monetary policy. Gold's price action suggests the metal remains well-supported despite near-term volatility.

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