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  • Gold price trades directionless as investors shift focus to US inflation data.
  • Investors worry that upside risks to headline CPI could elevate the likelihood of a final interest rate hike from the Fed.
  • The US economy may avoid recession but higher interest rates could dampen economic prospects.

Gold price (XAU/USD) faces fresh selling pressure as the US Bureau of Labor Statistics reported a slightly hotter-than-anticipated Consumer Price Index (CPI) report for August. US headline inflation expanded at a 0.6% pace as anticipated by market participants. Core CPI that excludes volatile oil and food prices expanded by 0.3%, higher than estimates and July’s reading of 0.2%. The US headline CPI, on an annual basis, accelerated to 3.6% from expectations of 3.6% and the prior release of 3.2%. Core CPI matched expectations of 4.3% in a similar period, remaining below the former reading of 4.7%. 

Market participants worry that upside risks to headline inflation could elevate the likelihood of a final interest rate hike from the Federal Reserve (Fed) in the rest of the year. The US economy is expected to face the wrath of strict monetary policy as the Fed is widely expected to keep interest rates higher for a longer period. US labor growth is stable but could come under pressure as firms are focusing on achieving efficiency by controlling costs. Apart from the inflation data, the Gold price would demonstrate a power-pack action after the interest rate decision by the European Central Bank (ECB) on Thursday.

Daily Digest Market Movers: Gold price faces selling pressure due to stubborn inflation

  • Gold price tests territory below the crucial support of $1,910.00 as US inflation data for August turned out stickier than anticipated.
  • US headline CPI, on an annual basis, rose to 3.7% vs. expectations of 3.6% and July’s reading of 3.2%. Core CPI, which strips off volatile food and energy prices, decelerated to 4.3% as anticipated against 4.7% recorded a month ago.
  • Monthly headline and core inflation expanded by 0.6% and 0.3%, respectively. A strong rebound in gasoline prices has triggered upside risks to headline inflation. Global Oil prices have rallied as much as 40% from May as OPEC sees rising demand for oil in the coming months.
  • Generally, markets majorly focus on core inflation. Still, Federal Reserve policymakers would not ignore a rebound in headline CPI as it would impact the real income of households and may propel prices of goods and services at factory gates.
  • Discussions about one more interest rate increase in the rest of the year could accelerate if higher energy prices increase pain for households.
  • However, the softening of core inflation beyond expectations could encourage the Fed to announce a pause to the historically aggressive rate-tightening spell.
  • As per the CME Group Fedwatch Tool, traders see a 93% chance for interest rates to remain unchanged at 5.25%-5.50% in September. For the rest of the year, traders anticipate almost a 55% chance for the Fed to keep the monetary policy unchanged.
  • Investors remain worried about US equities due to the upside risks of higher interest rates to corporate performance, triggering a risk-off profile.
  • Meanwhile, Goldman Sachs CEO David Solomon said on Tuesday that the US economy is likely to avoid a significant recession, but warned that inflation would be more persistent than market participants currently expect, as reported by Reuters.
  • The likelihood of a soft landing is high as inflation is coming down while the labor market is stable. However, inflationary pressures in excess of the desired rate of 2% would be the hardest nut to crack.
  • The US Dollar Index (DXY) sees less volatility above the immediate support of 104.40 ahead of the inflation data. Meanwhile, 10-year US Treasury yields rose sharply to 4.3%.
  • US consumer inflation data will be followed by Producer Price Index (PPI) and Retail Sales data, which are scheduled for Thursday.
  • Gold price is expected to deliver a power-pack action after the announcement of the interest rate decision by the European Central Bank (ECB) on Thursday. The ECB is widely expected to keep the main refinancing operations rate at 4.25% due to easing price pressures and rising risks of an economic slowdown.

Technical Analysis: Gold price tests region below $1,910

Gold price trades back and forth above the round-level support of $1,900.00 as investors remain sidelined ahead of the inflation data. The precious metal auctions inside the previous day’s range, demonstrate a sheer contraction in volatility. The yellow metal continues to find support from the 200-day Exponential Moving Average (EMA), which trades around $1,910.00, while the 20-day EMA around $1,921.00 continues to act as a barricade for Gold price.

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.


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