Gold just breached 200-day moving average: Why the US CPI report is key

Dhwani Mehta FXStreet

Gold just flashed a major sell signal on a breach of the critical 200-day SMA. While bears should remain cautious, the upcoming US CPI report could still reverse the outlook, deciding whether Gold rebounds to $4,450 or dives into deeper lows.

After the dive seen on Friday due to the US Nonfarm Payrolls blockbuster data, Gold is consolidating the bearish trend. Falling below the 200-day SMA was a crucial breakdown of a support that had provided a floor for prices several times in the past three months. Now, only a sustained recovery above this level could negate the bearish outlook.

Fed rate hike bets are mounting, and that’s not good for Gold

Fundamentals have shaped up significantly in the lead-up to the US CPI showdown. Gold is now clearly seen as a “sell-the-rallies” trade, and the upcoming US CPI data is eagerly awaited for fresh hints on whether the US Fed would opt for an interest rate hike later this year.

The May Nonfarm Payrolls outpaced expectations for a third month in a row, bolstering bets for a Fed rate hike by December. Markets now predict a roughly 70% chance of at least one rate hike before the end of the year, according to the CME Group’s FedWatch Tool.

Fed policymakers, in their recent speeches, have also raised concerns about inflation due to the continued Oil price surge, while calling for higher rates. So, this CPI report will be at the forefront of the FOMC officials’ minds.

Remember that Gold tends to thrive in a low-interest-rate regime. Therefore, Gold needs a softer-than-expected inflation print to alter these rate hike projections and reverse the bearish trend. The real question now is: will US CPI confirm Fed rate hike bets or push back against these expectations?

What do markets expect?

The annual core CPI inflation in the US is seen ticking higher to 2.9% in May. The monthly core CPI is expected to rise by 0.3% in May after a 0.4% increase in April. These core measures, which exclude the volatile food and energy categories, are shielded from the war’s impact on energy prices and present a real picture for the Fed.

Economic Indicator

Consumer Price Index ex Food & Energy (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

Key CPI scenarios for Gold prices

Gold is primed for intense volatility even if the inflation slows or comes in hotter. There are two main scenarios to focus on in the CPI release:

Hotter-than-expected inflation: If the annual and monthly core CPI inflation picks up at a quicker pace than expected, that would reaffirm the Fed rate hike bets. This scenario will exacerbate Gold’s melting trend, dragging the metal back to three-month lows near $4,270, below which the $4,200 round level will be tested.
Below-forecast inflation: Below-forecast US inflation data could scale back Fed rate-hike bets. In this case, the non-yielding bullion could rebound firmly to re-test the 200-day SMA at around $4,450. A break higher is more of a long shot, but could target the 21-day SMA near $4,510.

If inflation aligns with expectations, Gold could see minimal reaction but risks volatility amid incoming Middle East headlines.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Author

Dhwani Mehta

FXStreet

Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.

AUD/USD remains offered; supported by 0.7100

AUD/USD adds to Monday’s retracement, although it manages well to keep the trade above the 0.7100 yardstick ahead of the opening bell in Asia. Once again, the softer tone in spot follows decent gains in the Greenback amid rising bets for a Fed rate hike on Wednesday.

USD/JPY extends gains toward 155.00 amid USD resurgence

USD/JPY keeps pushing higher toward 155.00 early Tuesday, looking for more upside, as traders await the FOMC and BoJ meetings this week. Meanwhile, Fed rate-hike bets and oil-driven inflation risks keep US bond yields near multi-year highs, supporting the US Dollar and the pair. That said, a more hawkish repricing of the BoJ normalization path might continue to underpin the Japanese Yen and could limit USD/JPY's upside. .

Gold set to fall toward $4,000 as Warsh faces a Fed rate-hike dilemma

As the Federal Reserve monetary policy announcement approaches and the Middle East war intensifies, the US Dollar resumes its advance. Gold price posted a tepid attempt to recover its shine in early August, but with renewed USD demand, the bright metal faltered miserably and is now closer to the $4,000 mark than the encouraging $4,700 peak from a month ago.

Bitcoin pulls back as valuation ceilings hold while XAU weakness persists

Bitcoin (BTC) corrects alongside the broader cryptocurrency market on Tuesday as selling persists ahead of the United States (US) Federal Reserve (Fed) monetary policy decision. Market participants expect the central bank to raise interest rates to 3.75%-4.00% on Wednesday, potentially weighing on risk assets.

How Japan became the World's Banker and why that era may be ending

Japan's ultra-low interest rates helped finance trillions of dollars in global investments for more than a decade, making the Japanese Yen one of the world’s cheapest sources of funding. With the Bank of Japan expected to tighten policy again this week, that advantage may be entering a new phase. While most major economies raised interest rates, Japan remained the world's outlier.

Venezuela’s 65-billion-barrel Oil deal could reshape America’s inflation fight

The United States (US) has secured unprecedented access to part of Venezuela’s vast Oil reserves. The timing is particularly significant as the war with Iran is disrupting Middle Eastern supplies, keeping energy prices elevated and reviving concerns about inflation.