Gold price eyes a breakdown as inflation seems sticky
- Gold price finds selling pressure after a short-lived recovery ahead of inflation data.
- Investors await United States inflation data for further guidance.
- Fed Williams, Harker expect that interest rates have peaked for now.
Gold price (XAU/USD) drops amid a recovery in the US Dollar propelled by fading risk-taking ability of the market participants. The precious metal fails to maintain recovery even though Federal Reserve (Fed) policymakers anticipate that interest rates by the central bank have peaked for now. Also, the Fed could consider rate cuts next year if inflation continues to decelerate and job hiring slows further.
For September’s monetary policy guidance, investors await Thursday’s United States Consumer Price Index (CPI) data. Investors expect a rebound in headline CPI after a soft spell as recovered oil prices lift gasoline prices. US hiring slowed in July while the US Unemployment Rate remains near historic lows. Now July’s inflation data will set a base for the next interest rate decision.
Daily Digest Market Movers: Gold price eyes downside ahead of inflation data
- Gold price fails to sustain a recovery move despite the US Dollar remaining sideways ahead of United States inflation data.
- Earlier, the US Dollar Index senses heat due to neutral interest rate guidance from Federal Reserve policymakers.
- Philadelphia Fed President Patrick Harker said on Tuesday that the central bank could hold interest rates steady at this point and let monetary policy do its job. Investors should note that Fed Harker is not a voting member this year.
- Also, New York Fed President John Williams thinks interest rates have peaked for now and expects that the central bank will consider rate cuts next year.
- The US Dollar Index corrects sharply to near 102.40 as market sentiment turns positive, supported by the People’s Bank of China’s (PBoC) stronger-than-expected exchange rate fixing.
- Hawkish commentary from Fed Governor Michelle Bowman that the collaboration of still-elevated inflation and an upbeat labor market supports further policy tightening fails to keep the US Dollar at elevated levels.
- After a hiring slowdown and sustained wage growth, investors are shifting their focus toward the inflation data, which will be published on Thursday at 12:30 GMT.
- Per estimates, headline and core CPI that excludes volatile food and oil prices maintained a monthly pace of 0.2% in July. Annual headline CPI is expected to rebound to 3.3% vs. June’s print of 3.0%. On the contrary, core inflation is forecast to decelerate marginally to 4.7% against a prior reading of 4.8%.
- A higher consensus for headline CPI is backed by a solid recovery in global oil prices.
- A recovery in inflationary pressures might force the Fed to consider continuing to raise interest rates.
- The US government is planning to ban investment in Chinese artificial intelligence (AI) companies, reported Bloomberg. The administration plans to target only those Chinese companies that get more than 50% of revenue from the sectors of quantum computing and AI.
- The National Federation of Independent Business (NFIB) said its Small Business Optimism Index rose to 91.1 last month, the highest since November 2022 due to easing concerns about inflation expectations.
- On Tuesday, the US Census Bureau reported a Goods & Services Trade Balance deficit at a three-month low of $65.5 billion amid a decline in merchandise imports due to moderating consumer demand.
Technical Analysis: Gold price looks vulnerable above $1,920
Gold price finds a short-term cushion after testing crucial support of $1,920.00. For a solid recovery, the precious metal needs to pass through plenty of filters ahead. On a broader note, Gold price seems vulnerable after a Bear Cross conducted by the 20 and 50-day Exponential Moving Averages (EMAs). The 200-EMA at $1,907.00 should continue to provide cushion to the yellow metal ahead.
Inflation FAQs
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
What is the impact of inflation on foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Author
Sagar Dua
FXStreet
Sagar Dua is associated with the financial markets from his college days. Along with pursuing post-graduation in Commerce in 2014, he started his markets training with chart analysis.
