Gold looks well supported as US PPI and CPI growth fails to fade neutral policy hopes

Gold price looks supported but needs to pass through more filters for a confident reversal.
US inflation grew slower than forecasted in July as lower second-hand automobile prices offset rising rentals.
US President Biden restricts some new investment in China in sensitive technologies.

Gold price (XAU/USD) faces selling pressure as the United States Producer Price Index (PPI) accelerated higher than expected after a modest rise in the Consumer Price Index (CPI) for July. The precious metal attempted a recovery, but an upside isn’t warranted as investors are worried that inflation remains sticky amid rising rental prices. Consumer and producer inflation rose in July but is still insufficient to force the Federal Reserve (Fed) to raise interest rates further in September.

Producers elevate the prices of goods and services at factory gates by 0.3% while analysts forecasted a pace of 0.2%. Annual headline PPI rose to 0.8% against surprisingly higher expectations of 0.7%. Headline PPI rose beyond expectations due to a recovery in gasoline prices in July. Also, monthly core PPI grew at a 0.3% pace, higher than estimates of 0.2%.

US inflation rose at a steady pace of 0.2%, as expected by investors and aligned with the Fed’s required inflation rate of 2%. The recovery move was the Gold price is supported by a restricted upside in the US Dollar as chances of a rate cut in 2024 increase. San Francisco Fed President Mary Daly joined policymakers Patrick Harker and John Williams to open the door for rate cut discussions in 2024 depending on the evolution of the inflation economy.

Daily Digest Market Movers: Gold price looks supported despite robust US PPI growth

Gold price gauges support near $1,912.00 after a sheer sell-off. Still, the downside seems favored as United States CPI data for July showed inflation remains sticky.
The US Consumer Price Index rose at a slower-than-forecasted pace in July. Higher rentals and a modest recovery in gasoline prices were broadly offset by the lower cost of second-hand automobiles.
The monthly headline and core inflation grew by 0.2%, as expected by analysts.
Core annual CPI softened to 4.7% from estimates and the prior release of 4.8%, while headline inflation accelerated modestly to 3.2% against the former release of 3.0% but remained marginally below the consensus of 3.3%.
The 0.2% monthly increase is consistent with the Federal Reserve’s desired inflation rate of 2%.
A modest rise in US inflation supports the Fed to keep interest rates unchanged in September’s monetary policy.
As per the CME Group Fedwatch tool, traders see less than a 10% chance that the US will raise interest rates next month.
The scenario of limited inflation and a historically low Unemployment Rate suggests that the US economy will manage to avoid a recession.
On Thursday, San Francisco Fed Bank President Mary Daly joined Philadelphia Fed Bank President Patrick Harker and New York Fed President John Williams, saying that discussions about rate cuts would take place next year but will largely depend on the economy and inflation.
The US Dollar Index (DXY) refreshes the day's high above 102.60 as the headline PPI figure showed a rebound due to the recovery in gasoline prices.
On Thursday, the US Department of Labor reported that individuals applying for jobless claims for the first time rose to 248K for the week ending August 4, higher than the 230K expected and the prior week's figure of 227K.
The market mood remains cautious as US President Joe Biden announced restrictions on some new investments in China in sensitive technologies. Investors are worried that Beijing could retaliate.
The long-awaited order authorizes the U.S. Treasury Secretary to prohibit or restrict U.S. investments in Chinese entities in three sectors: semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems, Reuters reports.
Commercial banks borrowing from the Fed’s emergency lending programs rose slightly for the week through August 9. Total lending from the two Fed backstop programs rose to $108.78 billion from $107.58B the prior week.

Technical Analysis: Gold price turns volatile around $1,920

Gold price rebounds after momentum oscillators on a lower timeframe reported that the bearish impulse weakened due to a decline in selling pressure. Still, for a confident reversal, the yellow metal has to pass through plenty of filters. Gold price is on tenterhooks as it has corrected to near the 200-day Exponential Moving Average (EMA) around $1,907.68. Failure to sustain above this level would likely push the precious metal into bearish territory.

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.

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