Gold capitalizes on soft consumer expenditure and labor cost growth

Gold price falls back as Greenback swallows steroids amid US economic resilience.
US Q2 GDP, demand for Durable Goods in June remained robust due to higher consumer spending.
US recession fears fade significantly amid upbeat labor market conditions.

Gold price (XAU/USD) recovers downside blip propelled by softer-than-anticipated United States Q2 Employment Cost index and core Personal Consumption Expenditure (PCE) price index data. Earlier, the precious metal faced the burden of a stellar performance by the US economy in the second quarter, robust demand for durable products, and already tight labor market conditions. Gold price could remain volatile ahead as fears of further policy-tightening by the Federal Reserve (Fed) are renewed.

United States' economic resilience due to surprisingly higher Gross Domestic Product (GDP) data has defended against fears of recession. Also, Fed Chair Jerome Powell in his commentary on Wednesday said Fed officials are not anticipating a recession in the face of a tight labor market. More action will be witnessed in the US Dollar amid the release of the Fed’s preferred inflation gauge and the Employment Cost Index data.

Daily Digest Market Movers: Gold price rebounds as Fed's preferred inflation tool decelerates

Gold price fails to maintain strength as investors ignored a decline in the United States core Personal Consumption Expenditure (PCE) price index and labor cost index data.
The monthly US core PCE index gained at a pace of 0.2% in June as expected by the market participants against May's figure of 0.3%. Annually, the economic data decelerated to 4.% vs. the estimates of 4.2% and the prior release of 4.6%.
The Employment Cost Index dropped to 1.0% against expectations of 1.1% and the former release of 1.2%. A decline in the labor cost index would elevate the burden on households as soft earnings would be insufficient to offset inflated goods and services.
The performance of the US economy in the second quarter was surprisingly more upbeat than expected by investors.
US GDP grew at a pace of 2.4% in the April-June quarter, much better than estimates of 1.8% delivered by Reuters. In the January-March quarter, GDP expanded by 2.0%. The higher pace of GDP figures has reduced fears of a recession in the US economy.
The US Durable Goods Orders for June expanded at a phenomenal pace of 4.7% against expectations of 1.0% and May’s reading of 1.8%.
Robust demand for durable goods indicates upbeat momentum in consumer spending. This could make the core Consumer Price Index (CPI) more stubborn ahead.
Apart from the US GDP and factory orders, Initial Jobless Claims for the week ending July 21 remained below expectations. Individuals applying for jobless claims for the first time were 221K vs. the expected figure of 235K and prior reading of 228K.
In the face of a tight labor market and economic resilience, the Fed could raise interest rates at its September policy meeting.
Fed Chair Jerome Powell commented that September’s policy will be data-dependent.
The US Dollar Index climbs to near 102.00 due to robust economic data.
More action in the US Dollar is anticipated ahead of the Core Personal Consumption Expenditure (PCE) index for June and Employment Cost Index for the second quarter.
As per the preliminary forecasts, the Fed’s preferred gauge expanded by 0.2% in June, slower than May’s figure of 0.3%. On an annual basis, the economic data is seen declining to 4.2% against a prior release of 4.6%.
While the Labor Cost Index fell to 1.1% vs. the former release of 1.2%, investors should note that higher wages have been a major contributor to sticky US inflation. A decline in the index would raise hopes of easing inflationary pressures further.
For interest-rate guidance, Vanguard, an asset manager, expects the Fed to maintain a hawkish stance by either keeping interest rates elevated for longer than what the market is pricing or by tightening monetary conditions even further.
To safeguard US regional banks in a turbulent environment, US bank regulators released a proposal Thursday that would direct the nation's largest banks to raise their capital, arguing a larger cushion is needed to ensure stability, Reuters reported.

Technical Analysis: Gold price kisses $1,960

Gold price faces pressure after a short-lived recovery move close to $1,956.00 as the US Dollar extends its upside. The precious metal shifts into bearish territory after delivering a breakdown of the Double Top chart pattern around $1,980.00, which foreshadows a bearish reversal. The yellow metal tests the region below the 20-day and 50-day Exponential Moving Averages (EMAs), which conveys that the short and medium-term trend is turning bearish.

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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