- Gold price bounces from daily lows of $2,356, now at $2,385.
- Fed’s preferred inflation gauge shows mixed results, edging closer to the 2% target.
- US Treasury yields slump as bonds rally, signaling potential for multiple Fed rate cuts this year.
Gold price makes a U-turn after diving to two-week lows of $2,353 edges higher some 0.80% as market participants seem secure the Federal Reserve will lower interest rates at the September meeting, following a soft inflation report. The XAU/USD trades at $2,385 after bouncing off daily lows of $2,356.
The US Bureau of Economic Analysis (BEA) revealed that the Fed’s favorite inflation gauge, the Personal Consumption Expenditure Price Index (PCE), ticked a tenth higher monthly than May’s data. It dipped as foreseen in the twelve months to June, though it’s at the brisk of hitting the Fed’s 2% goal.
June’s Core PCE edged up a tenth every month, while year-over-year (YoY) was unchanged, above projections.
Following the data, US bonds rallied, and consequently, US Treasury yields slumped, with the 10-year note sliding four and a half basis points to 4.202%.
Sources cited by Reuters noted, “Today’s mixed-to-weaker U.S. data suggests inflationary pressures and economic activity are waning, paving the way for the Fed to cut rates twice this year.”
Daily digest market movers: Gold price bounces off weekly lows
- The US PCE in June rose by 0.1% month-over-month (MoM) and 2.5% year-over-year (YoY); both figures were as expected, with the annual rate falling from 2.6%.
- Core PCE expanded by 0.2% MoM, exceeding estimates and May’s figure. On an annual basis, Core PCE rose by 2.6%, higher than forecasts and unchanged from the prior month’s reading.
- The University of Michigan Consumer Sentiment survey, in its final reading, jumped to 66.4, missing projections of 66.
- Inflation expectations for one year decreased from 3% to 2.9%, while for a five-year period, they remained unchanged at 3%.
- Data from the Chicago Board of Trade (CBOT) shows that traders are pricing in 55 basis points (bps) of easing towards the end of the year, as indicated by the December 2024 fed funds rate futures contract.
Technical analysis: Gold price climbs but remains below $2,400
Gold prices remain upward biased, snapping two days of losses and forming a ‘bullish harami’ two-candle chart. Momentum hints that buyers are still in charge, as depicted by the Relative Strength Index (RSI), which pierced above the 50-neutral line, opening the door for further upside.
XAU/USD buyers must reclaim $2,400 before pushing prices above the psychological $2,450 area. A breach of the latter will expose the all-time high (ATH) at around $2,483, followed by the $2,500 mark.
On the flip side, if XAU/USD continues to edge lower and drop below the 50-day moving average (DMA) at $2,359, further losses are on the cards. The next support would be the July 25 daily low of $2,353. Once those levels are removed, the 100-DMA would be up next at $2,324, ahead of diving to the $2,300 mark.
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.
