Gold falls over 3% as US inflation data sustains Fed hike expectations
- Gold trades near an 11-week low as in-line US inflation data keeps Fed rate-hike expectations intact.
- Headline US inflation rises to 4.2%, its highest level since April 2023.
- A break below the 200-day SMA keeps the technical outlook firmly bearish.
Gold (XAU/USD) remains under pressure on Wednesday as the latest US inflation data broadly matched market expectations and did little to alter expectations that the Federal Reserve could raise interest rates later this year. At the time of writing, XAU/USD is trading around $4,125 near 11-week lows, down over 3.0% on the day.
Headline Consumer Price Index (CPI) accelerated to 4.2% YoY in May, its highest level since April 2023. Core CPI rose to 2.9%. However, monthly core inflation eased to 0.2% from 0.4%.
The pickup in inflation comes after the US-Iran war triggered a sharp rise in energy prices, pouring cold water on the Fed's efforts to bring inflation back toward its 2% target.
Before the war began, markets were pricing in at least two rate cuts this year. Those bets have now disappeared, with traders increasingly expecting a rate hike by year-end.
Markets are currently pricing in a 33% chance of a 25-basis-point (bps) rate hike in September, with the odds increasing to 38% for October and 42% for December, according to the CME FedWatch Tool. Higher interest rates are typically negative for Gold because the precious metal offers no yield.
Meanwhile, hopes for a near-term peace deal between the United States and Iran appear slim after both sides launched renewed strikes on Tuesday. US President Donald Trump warned in a Truth Social post that Iran had "taken too long to negotiate a deal that would have been great for them" and that Tehran would now "have to pay the price."
The geopolitical uncertainty, combined with hawkish Fed expectations, has kept the US Dollar (USD) supported near recent highs, creating an additional headwind for Dollar-denominated Gold.
Technical analysis: XAU/USD eyes March low after decisive break below 200-day SMA
XAU/USD remains under heavy selling pressure after breaking below the key 200-day Simple Moving Average (SMA) at $4,443. The Relative Strength Index (RSI) has slipped to oversold territory near 27 on the daily chart, while the Average Directional Index (14) rises above 30, suggesting a strengthening downtrend despite stretched short-term conditions.
On the downside, the March low at $4,098 serves as the next key support level, where buyers may attempt to halt the decline. On the topside, any rebound would first confront the 200-day SMA at $4,443, followed by the 50-day SMA at $4,608 and then the 100-day SMA at $4,782, with the cluster of moving averages overhead likely to limit recovery attempts unless decisively reclaimed.
(The technical analysis of this story was written with the help of an AI tool.)
Gold FAQs
Gold has played a key role in human’s history as it has been widely used as a store of value and medium of exchange. Currently, apart from its shine and usage for jewelry, the precious metal is widely seen as a safe-haven asset, meaning that it is considered a good investment during turbulent times. Gold is also widely seen as a hedge against inflation and against depreciating currencies as it doesn’t rely on any specific issuer or government.
Central banks are the biggest Gold holders. In their aim to support their currencies in turbulent times, central banks tend to diversify their reserves and buy Gold to improve the perceived strength of the economy and the currency. High Gold reserves can be a source of trust for a country’s solvency. Central banks added 1,136 tonnes of Gold worth around $70 billion to their reserves in 2022, according to data from the World Gold Council. This is the highest yearly purchase since records began. Central banks from emerging economies such as China, India and Turkey are quickly increasing their Gold reserves.
Gold has an inverse correlation with the US Dollar and US Treasuries, which are both major reserve and safe-haven assets. When the Dollar depreciates, Gold tends to rise, enabling investors and central banks to diversify their assets in turbulent times. Gold is also inversely correlated with risk assets. A rally in the stock market tends to weaken Gold price, while sell-offs in riskier markets tend to favor the precious metal.
The price can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can quickly make Gold price escalate due to its safe-haven status. As a yield-less asset, Gold tends to rise with lower interest rates, while higher cost of money usually weighs down on the yellow metal. Still, most moves depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAU/USD). A strong Dollar tends to keep the price of Gold controlled, whereas a weaker Dollar is likely to push Gold prices up.
Author
Vishal Chaturvedi
FXStreet
I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.
