Gold price gathers strength as US CPI inflation fuels Fed rate cuts

Gold price trades in positive territory due to the weaker USD on Thursday. 
The softer US CPI inflation data prompted the hope that the Fed may cut interest rates, boosting the price of precious metals.
The Fed’s hawkish remarks might cap gold’s upside; Fed’s Barr, Harker, Mester, and Bostic are set to speak on Thursday. 

The gold price (XAU/USD) gains traction amid the weaker US Dollar (USD) on Thursday. The recent Consumer Price Index (CPI) report showed inflation in the US slowed in April, prompting market players to increase their bets on the US Federal Reserve (Fed) rate cuts this year. A lower interest rate might benefit the yellow metal, as it means the borrowing cost of investing in gold decreases. 

Gold traders will focus on US Building Permits, Housing Starts, the weekly Initial Jobless Claims, the Philly Fed Manufacturing Index, and Industrial Production on Thursday. Also, the Fed’s Barr, Harker, Mester, and Bostic are scheduled to speak on Thursday. Nonetheless, the hawkish comments from the Fed’s officials might boost the US Dollar (USD) and cap the precious metal’s upside in the near term.

Daily Digest Market Movers: Gold price edges higher due to cooling US inflation, weaker Retail Sales

The US Consumer Price Index (CPI) increased by 3.4% YoY in April, compared to a rise of 3.5% in March, which is in line with market expectations. On a monthly basis, the headline CPI inflation dropped to 0.3% MoM in April from 0.4% in March, below the consensus of 0.4%. 
The core CPI inflation, which excludes volatile items like food and energy, rose by 3.6% YoY in April, compared to the previous reading of 3.8%. The monthly core CPI eased to 0.3% MoM in April from 0.4% in March. 
US Retail Sales came in at 0% MoM in April from a 0.6% rise in March, worse than the estimation of 0.4%.  
Fed Bank of Minneapolis President Neel Kashkari said on Wednesday that the central bank needs to watch the economy carefully to see if current policy rates are restrictive enough.
Financial markets are currently pricing in a nearly 75% chance of a rate cut by the Fed in September 2024, a rise from 65% before the US CPI report, according to the CME’s FedWatch Tool.
According to the World Gold Council’s Q1 2024 report, global gold demand climbed by 3% to 1,238 tonnes, marking the strongest first quarter since 2016. 

Technical Analysis: Gold price’s bullish outlook holds strong 

The gold price edges higher on the day. Technically, the yellow metal has formed an ascending trend channel since May 2. The yellow metal maintains its positive stance unchanged on the four-hour chart as XAU/USD holds above the 100-period Exponential Moving Averages (EMA). The Relative Strength Index (RSI) stands in bullish territory around 72. The overbought RSI condition indicates that further consolidation cannot be ruled out before positioning for any near-term XAU/USD upside. 

The first upside barrier will emerge near the upper boundary of the ascending trend channel and psychological level of $2,400. A bullish breakout above this level will expose $2,432 (all-time high) en route to $2,500 (round figure). 

On the downside, a breach of the lower limit of the ascending trend channel of $2,345 will pave the way to $2,334 (100-period EMA), followed by $2,300 (psychological mark). 

US Dollar price this week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the New Zealand Dollar.

 
USD
EUR
GBP
CAD
AUD
JPY
NZD
CHF

USD
 
-1.05%
-1.30%
-0.53%
-1.26%
-1.22%
-1.73%
-0.67%

EUR
1.02%
 
-0.26%
0.52%
-0.21%
-0.16%
-0.67%
0.38%

GBP
1.29%
0.25%
 
0.78%
0.04%
0.09%
-0.43%
0.65%

CAD
0.52%
-0.54%
-0.78%
 
-0.74%
-0.69%
-1.20%
-0.14%

AUD
1.24%
0.21%
-0.05%
0.73%
 
0.04%
-0.46%
0.60%

JPY
1.20%
0.16%
-0.11%
0.70%
-0.04%
 
-0.53%
0.56%

NZD
1.68%
0.67%
0.39%
1.18%
0.45%
0.48%
 
1.03%

CHF
0.65%
-0.39%
-0.65%
0.14%
-0.61%
-0.56%
-1.04%
 

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

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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