Gold price refreshes three-week low, pressured by inflation-inspired caution
- Gold price prints a fresh intraday low amid caution ahead of US Inflation data.
- A tight labor market and high inflation could force the Fed to lift interest rates further.
- Fed Williams seems confident that the central bank would consider a rate cut in early 2024.
Gold price (XAU/USD) refreshes its intraday low below around $1,923.00 as concerns over Thursday’s Consumer Price Index (CPI) data dampen its appeal. The precious metal comes under severe pressure amid strength in the US Dollar as investors hope that the United States inflation could turn out persistent due to sustained wage growth and global oil price recovery.
Sticky inflationary pressures in the United States economy are going to force Federal Reserve (Fed) policymakers to consider a continuation of its aggressive rate-tightening cycle. US home-buyers are already facing the burden of higher borrowing costs and further policy tightening would impact the demand for new houses.
Daily Digest Market Movers: Gold price drops sharply amid bearish market sentiment
- Gold price remains directionless above $1,930.00 as investors await United States inflation data for a decisive move.
- The precious metal surrenders marginal gains inspired by a hiring slowdown as wage growth remains steady and the jobless rate near historic lows.
- The Nonfarm Payrolls (NFP) report conveys a significant slowdown in firms’ hiring process, portraying a cautious economic outlook.
- Wage growth remains intact as firms offer decent hikes to retain talent.
- In spite of a hiring slowdown, the labor market is still tight enough to create inflationary pressures.
- 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.
- In addition to an upbeat labor market, investors have started anticipating that the global oil price recovery could elevate gasoline prices and headline inflation could become stubborn.
- This week, the show-stopper event will be the US Consumer Price Index data, which will be published on Thursday at 12:30 GMT.
- Per estimates, headline and core CPI maintained the pace of 0.2% in July. Annual headline CPI rebounded to 3.3% vs. June’s print of 3.0%. Contrary, core inflation that excludes volatile food and oil prices decelerated marginally to 4.7% against a prior reading of 4.8%.
- Signs of persistence in US inflation would elevate hopes of a continuation of the rate-tightening cycle by the Federal Reserve (Fed).
- Fed Governor Michelle Bowman said at a community event in Atlanta that the duo of the tight labor market and still-elevated inflation supports more interest rate hikes from the central bank ahead.
- About interest rate guidance beyond 2023, New York Fed President John C. Williams said on Monday that the possibility of cutting rates in early 2024 cannot be ruled out. He further added that inflation is coming down as expected and the jobless rate could elevate as the economy cools off.
- The US Dollar Index climbs to near 102.40, supported by a cautious market mood.
- A survey from Fannie Mae showed that the percentage of consumers claiming the current period bad for buying a new home rose to 82%, the highest in at least 13 years due to rising borrowing costs.
Technical Analysis: Gold price tests three-week low
Gold price struggles to stabilize above the immediate support of $1,930.00 amid an absence of supportive economic indicators. The precious metal shifts into bearish territory after a breakdown of the Head and Shoulders chart pattern formed on a lower time frame. Bear cross, represented by the 20 and 50-day Exponential Moving Averages (EMAs) at $1,950.00, indicates more weakness ahead. The yellow metal is seen declining toward the 200-day EMA, which is hovering around $1,907.00.
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.
