- Gold benefits from a weaker US Dollar, and edges up 0.45%, amid firm US Treasury bond yields.
- Investors eye the upcoming PCE Price Index, the Fed’s preferred inflation measure, which could impact rate cut expectations.
- The US Dollar Index (DXY) falls as the CME FedWatch Tool indicates a 66% chance of a rate cut in September, up from 59.5%.
Gold jumped off last Friday’s low and benefitted from a weaker US Dollar on Monday. On Friday, investors are bracing for the release of the Federal Reserve’s preferred gauge for inflation, the Personal Consumption Expenditures (PCE) Price Index. XAU/USD trades at $2,331, up 0.45%, while the Greenback falls amid firm US Treasury bond yields.
Risk appetite deteriorated; investors seeking safety flock to the golden metal. US Treasury bond yields are flat, as depicted by the 10-year Treasury note standing at 4.253% unchanged.
The US Dollar Index (DXY), which tracks the value of American currency against a basket of six other currencies, fell 0.26% to 105.53.
The US economic docket will feature the Fed’s preferred gauge for inflation, the PCE. If the data aligns with the consensus, this will mean that the disinflation process is evolving as Fed policymakers expect and increase the chances for an interest rate cut as soon as September.
According to the CME FedWatch Tool, traders are pricing in a 66% chance of easing in September, up from 59.5%.
In the meantime, San Francisco Fed President Mary Daly said the labor market is ‘nearing” an inflection point, where further weakening will signify higher unemployment. Daly’s comments signal she’s leaning dovish as she added, “At this point, inflation is not the only risk we face.”
The December 2024 federal funds rate futures contract implies the Fed will ease policy by just 36 basis points (bps) toward the end of the year.
Daily digest market movers: Gold price advances on a soft US Dollar
- Headline PCE is expected to hit 0% in May, lower than April’s 0.3%, and in the twelve months to May, to edge lower from 2.7% to 2.6%.
- Core PCE is foreseen at 0.1% MoM, down from 0.2%, and on an annual basis, is estimated to dip from 2.8% to 2.6%.
- Last week’s US economic data was mixed. On the growth side, the economy remains robust via strong S&P Global Flash PMIs and a slowdown in Retail Sales. Nevertheless, it shows some weakness on the labor market side.
- Fed officials advised patience regarding interest rate cuts, emphasizing that their decisions would remain data dependent. Despite last week’s positive CPI report, policymakers reiterated the need to see more data like May’s before considering any changes.
Technical analysis: Gold price climbs and test Head-and-Shoulders neckline at around $2,330
Gold price remains downward biased after forming a ‘bearish-engulfing’ chart pattern on Friday. This further validates the Head-and-Shoulders chart pattern, meaning that further downside is expected for the non-yielding metal
The XAU/USD next support would be $2,300. Once cleared, XAU/USD would fall to $2,277, the May 3 low, followed by the March 21 high of $2,222. Further losses lie underneath, with sellers eyeing the Head-and-Shoulders chart pattern objective from $2,170 to $2,160.
Conversely, if Gold reclaims $2,350, that will expose additional key resistance levels like the June 7 cycle high of $2,387, ahead of challenging the $2,400 figure.
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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