Gold seems baffled as investors await inflation data
- Gold price recovers as Greenback corrects to US CPI despite caution ahead of US CPI.
- Fed’s Bostic supports the continuation of the rate-tightening cycle amid resilience in consumer spending.
- JP Morgan looks confident that the US economy will not enter a recession.
Gold price (XAU/USD) attempts recovery as caution fades-inspired by upcoming United States Consumer Price Index (CPI) data, which will be released on Thursday. Earlier, the precious metal struggles to deliver a decisive move as the impact of a slowdown in firm hiring is offset by sticky wage growth and a lower Unemployment Rate.
The US Dollar Index (DXY) shows resilience as the recovery in global oil prices supports persistence in United States inflation. In addition to that, hawkish commentary from Federal Reserve (Fed) policymaker Raphael Bostic supports the US Dollar to defend against a hiring slowdown. Momentum in the US Dollar could strengthen further as JP Morgan raises its forecast for real annualized Gross Domestic Product (GDP) from Q3 to 2.5%, significantly higher than the prior estimate of 0.5%.
Daily Digest Market Movers: Gold price finds cushion ahead of US CPI
- Gold price bounces back $1,940.00 as investors turn cautious ahead of United States inflation data, which will be published on Thursday at 13:00 GMT.
- The precious metal fails to sustain its recovery propelled by mixed Nonfarm Payrolls (NFP) data for July, released on Friday.
- US NFP report showed that the labor market witnessed a fresh addition of 187K payrolls in July. June’s 209K figure was downwardly revised to 185K. This was the lowest figure since December 2020.
- While job growth slows down, the Unemployment Rate dropped to 3.5% vs. the estimates and the former release of 3.6%.
- Wage growth turned out stable despite a slowdown in the hiring process. The monthly labor cost index maintained its growth pace of 0.4% as recorded in June while investors anticipated a decline in the economic data to 0.3%. Annual economic data also remained stable at 4.4% against expectations of 4.2%.
- Sustained wage growth would keep US inflationary pressures elevated and might force the Fed to raise interest rates further.
- Atlanta Fed Bank President Raphael Bostic said on Friday that July’s employment remains in line with expectations and he is not surprised that wage growth is still strong. He further added that the central bank will keep interest rate policy restrictive in 2024.
- The US Dollar Index managed to rebound after defending the bearish impact of steady payrolls report after hawkish commentary from Fed Governor Michelle Bowman.
- Fed Bowman said over the weekend that the central bank will raise interest rates further to bring inflation down. She further added that she supported further policy tightening in July amid strong consumer spending, a tight labor market, and still-high inflation.
- Per CME Fedwatch Tool, there is a more than 84% chance in favor of a steady interest rate policy in September.
- After mixed employment data, investors shift focus to the inflation data. On a monthly basis, headline and core CPI are expected to maintain their pace of 0.2% as global oil prices rebounded sharply last month.
- Sticky inflationary pressures might force the Fed to continue the policy-tightening spell.
- Last week, US equities came under pressure after Fitch downgraded the US government’s long-term debt rating.
- JP Morgan is confident that the US economy will not enter into a recession. Investment banking firm raises real annualized GDP growth forecast for July-September quarter to 2.5% from 0.5%.
Technical Analysis: Gold price finds intermediate cushion
Gold price retraces after a less confident pullback move to near $1,947.00. The precious metal attempts a weak attempt of surpassing the 20-day Exponential Moving Average (EMA). The yellow metal oscillates inside Friday’s range as investors await US inflation data for a decisive move. Momentum oscillators demonstrate a volatility squeeze, which is expected to continue 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.
