- Gold price struggles for a decisive move despite a slightly hotter inflation report.
- The US Dollar demonstrates a volatility compression as higher headline CPI failed to boost Fed hawks.
- The release of the US PPI and Retail Sales might boost price action in Gold.
Gold price (XAU/USD) delivers wild moves as the US Dollar rises vertically after strong consumer spending momentum and higher headline Producer Price Index (PPI) data. The US Census Bureau reported that monthly Retail Sales rose sharply by 0.6% in August vs. expectations of 0.2% and July’s reading of 0.5%. Monthly headline PPI grew by 0.7% vs. estimates and the former release of 0.4%. The US headline PPI, on an annual basis, accelerated to 1.6%, doubling the former release of 0.8%.
The US Department of Labor showed that individuals claiming jobless benefits for the first time rose by 220K while investors anticipated higher jobless claims at 225K. In the previous week, jobless benefits were recorded at 216K. Jobless claims remained higher than the prior week’s figures after declining straight for five weeks.
Earlier, the yellow metal remained subdued on Thursday as a stickier US inflation report for August confused investors about further direction. The precious metal strives for a decisive move as the market hopes that the impact of higher headline inflation due to rising gasoline prices remains limited to the headline Consumer Price Index (CPI). The US Dollar demonstrates a volatility compression after a slightly hot inflation report failed to prompt hawkish Federal Reserve (Fed) bets.
After the US inflation report, investors shifted their focus to the consumer spending data for August, which will solve the interest rate puzzle further. The current restrictive interest rate cycle has failed in denting labor demand and consumer spending significantly, but the market remains worried that a “higher for longer” rate context could dampen the broader picture ahead.
Daily Digest Market Movers: Gold price turns volatile on upbeat US Retail Sales data
- Gold price faces selling pressure due to upbeat consumer spending momentum. Monthly Retail Sales for August rose sharply by 0.6% in August vs. expectations of 0.2% and July’s reading of 0.5%. Monthly headline PPI grew by 0.7% vs. estimates and the former release of 0.4%. The US headline PPI, on an annual basis, accelerated to 1.6%, doubling the former release of 0.8%.
- The US Department of Labor showed that individuals claiming jobless benefits for the first time rose by 220K while investors anticipated higher jobless claims at 225K. In the previous week, jobless benefits were recorded at 216K. Jobless claims remained higher than the prior week’s figures after declining straight for five weeks.
- On Wednesday, the US Bureau of Labor Statistics reported that monthly headline inflation grew at a 0.6% pace as anticipated by market participants, higher than the former reading of 0.2% due to a rally in gasoline prices. Annualized headline CPI accelerated to 3.7% vs. expectations of 3.6% and the former release of 3.2%.
- Core CPI that strips off volatile food and oil prices expanded at a higher pace of 0.3% than expectations and the prior reading of 0.2%. US core CPI, on an annual basis, softened to 4.3% as projected against July’s reading of 4.7%.
- Overall energy prices that include components like gasoline, electricity, and utility gas prices spiked 5.6% in August due to the global oil rally that pushed headline inflation higher at a stronger pace.
- Federal Reserve policymakers tend to consider core CPI specifically, but higher headline inflation could prompt input prices for core goods and encourage them to keep doors open for further policy tightening.
- As per the CME Fedwatch Tool, traders see a 97% chance for interest rates to remain steady at 5.25-5.50% at the September 20 Federal Open Market Committee (FOMC). The bet was 93% before the inflation data release. For the rest of the year, traders anticipate almost a 56% chance for the Fed to keep monetary policy unchanged.
- JP Morgan Asset Management commented Wednesday that it does not anticipate the Fed implementing further interest rate hikes this cycle. They said that the impact of the ongoing rise of oil prices in early September on inflation will be limited.
- Inflation data for August remained insufficient to boost hopes for more interest rate increases from the Fed in 2023, but a likely slowdown in the economy cannot be avoided. The Fed is expected to keep interest rates “higher for longer” as inflation in excess of the required rate seems stickiest. The Unemployment Rate is seen rising further due to a poor demand outlook and higher interest rates.
- The US Dollar Index (DXY) trades in a limited range around 104.70 as the upside is restricted amid expectations that the Fed is done with hiking interest rates, while the downside is being supported by a slightly hotter inflation report.
Technical Analysis: Gold price continues to defend the $1,900 support
Gold price hovers near a three-week low, marginally above the crucial support of $1,900. The precious metal struggles to discover bids as the inflation report for August indicates upside risks to headline inflation due to rising gasoline prices. The yellow metal fails to sustain above the 200-day Exponential Moving Average (EMA), which trades at around $1,910.00. The declining 20 and 50 EMAs portray a bearish short-term trend.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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