Gold price stays firm above $2,500 post US inflation report
- Gold retreats from a daily high of $2,529 after US inflation data boosts odds of a 25 bps Fed rate cut.
- Rising US Treasury yields and a stronger US Dollar weigh on the non-yielding metal with the 10-year T-note climbing to 3.655%.
- CME FedWatch Tool shows 71% chance of a 25 bps cut.
Gold fell late in the North American session, down by 0.18%, after hitting a daily peak of $2,529. US inflation data prompted traders to cut longs in the non-yielding metal due to increasing odds that the Federal Reserve (Fed) will kick off its easing cycle with a 25-basis-point (bps) interest rate cut. The XAU/USD trades at $2,511.
Sentiment remains positive after the US Bureau of Labor Statistics revealed August’s Consumer Price Index (CPI). Monthly headline inflation remained unchanged, while the monthly core, which excludes food and energy, ticked up a tenth.
Market participants pushed US Treasury yields higher amid fears that the Fed could be dissuaded from cutting interest rates by 50 basis points (bps) and instead might opt for 25 bps next week.
The US 10-year Treasury rose to 3.655%, up by one and a half bps. The Greenback was bolstered after the news, hitting a daily high of 101.82, according to the US Dollar Index (DXY). At the time of writing, the DXY is virtually unchanged at 101.68.
Investors had trimmed their odds for a 50 bps Fed rate cut, according to the CME FedWatch Tool. The chances are at 29%, while 25 bps lie at 71%.
The Presidential debate between Vice President Kamala Harris and former President Donald Trump was won by Harris, according to a CNN poll.
In the geopolitical space, US Secretary of State Anthony Blinken and the UK’s David Lammy heightened concerns that the US and UK could grant Ukraine the ability to use weapons from Western nations to strike inside Russia.
Daily digest market moves: Gold price drops following US CPI release
- US Bureau of Labor Statistics’ CPI data revealed that headline inflation for August dipped from 2.9% to 2.6% YoY) as expected.
- However, US core CPI, which excludes volatile items and is considered a more accurate inflation gauge, remained unchanged at 3.2% YoY. On a monthly basis, core CPI rose from 0.2% to 0.3%, while headline CPI stood at 0.2% MoM.
- Data from the Chicago Board of Trade suggests the Fed is now expected to cut at least 98 basis points this year, down from 108 basis points a day ago, according to the December 2024 fed funds rate futures contract.
- Last Friday, Fed officials were dovish. New York Fed President John Williams said that cutting rates will help keep the labor market balanced, while Governor Christopher Waller said that “the time has come” to ease policy.
- Chicago Fed President Austan Goolsbee was dovish, saying policymakers have an “overwhelming” consensus to reduce borrowing costs.
- It is worth noting that Fed officials entered their blackout period ahead of the Federal Open Market Committee (FOMC) monetary policy meeting.
- Data from the Chicago Board of Trade indicates that the Fed is anticipated to cut at least 98 bps this year, based on the fed funds rate futures contract for December 2024.
Technical outlook: Gold price clings to $2,500 despite posting losses
Gold price is subdued, consolidated within the $2,500 to $2,531 area. Even though momentum remains bullish, as depicted by the Relative Strength Index (RSI), it is flat above its neutral line, indicating that neither buyers nor sellers are in control.
If XAU/USD clears the all-time high of $2,531, the next resistance would be the $2,550 mark. Once hurdled, the next stop would be the psychological $2,600 figure.
Conversely, if Gold price slides below $2,500, the next support would be the August 22 low at $2,470. On further weakness, the next demand zone would be the confluence of the May 20 high, which turned into support, and the 50-day Simple Moving Average (SMA) between $2,450 and $2,440.
Inflation FAQs
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%.
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.
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.
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.