- Gold prices climb following US Q1 GDP results falling below expectations.
- Sharp increase in Q1 inflation to 3.7% tempers expectations for immediate Fed rate cuts and underpins higher Treasury yields.
- Fed officials maintain cautious stance on monetary policy, echoing concerns over persistent inflation pressure.
Gold prices advanced modestly during Thursday’s North American session, gaining more than 0.5% following the release of crucial economic data from the United States (US). GDP figures for the first quarter of 2024 missed estimates, increasing speculation that the US Federal Reserve (Fed) could lower borrowing costs. However, inflation for the same period jumped sharply, which would delay interest rate cuts by the Fed.
XAU/USD trades at $2,330 after bouncing off daily lows of $2,305 amid higher US Treasury yields, courtesy of the reacceleration of inflation. As expected by analysts, the US economy would slow down in 2024, but it missed the mark by a full percentage point in the first quarter. That would keep the “soft landing” narrative in place, but underlying inflation for Q1 2024 rose by 3.7% QoQ, above estimates and crushing the 2% registered in the last quarter of 2023.
This justified Fed officials’ change of stance last week. Chairman Jerome Powell gave the green light when he commented, “Recent data shows lack of further progress on inflation this year.”
Those words were echoed by a slew of policymakers, most significantly by the ultra-dovish Chicago Fed President, Austan Goolsbee, who said, “Fed’s current restrictive monetary policy is appropriate.”
Daily digest market movers: Gold price climbs amid highs US yields, soft USD
- Gold advance continues even though US Treasury yields advance. The US 10-year note yield is up six basis points (bps) at 4.706%, while US real yields, which closely correlate inversely with the golden metal, are also up by the same amount, at 2.296%.
- A softer Greenback also underpins the yellow metal. The US Dollar Index (DXY) is down 0.22% at 105.59.
- US GDP for Q1 2024 expanded by 1.6% QoQ, below estimates of 2.5%, and trailed Q4 2023’s 3.4%. The core Personal Consumption Expenditure Price Index (PCE) for the same period rose 3.7%, crushing estimates of a 3.4% increase and up from 2% in the previous reading.
- In addition, the US labor market remains strong. Initial Jobless Claims for the week ending April 20 missed estimates of 214K, coming at 207K, less than the previous reading.
- Upcoming Q1 GDP data and core PCE inflation figures will provide key insights into the possible timing of the Fed’s interest rate reductions. The core PCE, the Fed’s preferred measure of inflation, is expected to maintain a steady monthly growth of 0.3%. Additionally, the annual core PCE rate is anticipated to decrease to 2.6% from 2.8% in February.
- Data from the Chicago Board of Trade (CBOT) suggests that traders expect the fed funds rate to finish 2024 at 5.035%, up from 4.98% on Wednesday.
Technical analysis: Gold price hovers near $2,330 as buyers take a breather
Gold price edges up, but it’s facing resistance at $2,337, the April 24 high. A breach of the latter will expose the psychological $2,350 figure, followed by the $2,400 mark. Subsequent gains lie once that supply zone is cleared, followed by the April 19 high at $2,417, followed by the all-time high of $2,431.
On the flip side, if the XAU/USD price dips below the April 15 daily low of $2,324, that would pave the way to test $2,300. A breach of the latter would expose the April 23 low of $2,229, followed by the March 21 high at $2,222.
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.
