Home Forex Gold gains strength as US CPI inflation supports Fed rate cuts

Gold gains strength as US CPI inflation supports Fed rate cuts

by SuperiorInvest
  • The price of gold is trading in positive territory due to a weaker dollar on Thursday.
  • Softer U.S. CPI inflation data fueled hopes that the Fed may cut interest rates, boosting the price of precious metals.
  • Hawkish Fed remarks could cap gold's rally; The Fed's Barr, Harker, Mester and Bostic are scheduled to speak on Thursday.

The the price of gold (XAU/USD) is gaining strength on Thursday amid a weaker US dollar (USD). The recent Consumer Price Index (CPI) report showed that US inflation slowed in April, prompting market players to increase their bets on the US. Federal Reserve System (The Fed) cut rates this year. A lower interest rate could benefit the yellow metal as it means the borrowing costs of investing in gold will decrease.

Gold traders will focus on US building permits, housing starts, weekly Initial Jobless Claims, the Philly Fed Manufacturing Index and industrial production on Thursday. The Fed's Barr, Harker, Mester and Bostic are also scheduled to speak on Thursday. However, hawkish comments from Fed officials could support the US dollar (USD) in the near term and limit the precious metal's gains.

Daily Digest Market Movers: Gold rises on cooling US inflation, weaker retail sales

  • The U.S. Consumer Price Index (CPI) rose 3.4% year-on-year in April, compared with a 3.5% rise in March, in line with market expectations. On a month-on-month basis, headline CPI inflation fell to 0.3% month-on-month in April from 0.4% in March, below consensus of 0.4%.
  • Core CPI inflation, which excludes volatile items such as food and energy, rose 3.6% year-on-year in April, compared with the previous reading of 3.8%. Monthly core CPI eased to 0.3% month-on-month in April from 0.4% in March.
  • US retail sales rose 0% month-on-month in April from a 0.6% gain in March, worse than the 0.4% estimate.
  • Fed Bank of Minneapolis President Neel Kashkari said Wednesday that the central bank needs to closely monitor the economy to determine whether current interest rates are restrictive enough.
  • According to CME's FedWatch tool, financial markets currently estimate a near 75% chance of a rate cut by the Fed in September 2024, up from 65% ahead of the US CPI report.
  • According to the World Gold Council's Q1 2024 report, global gold demand rose 3% to 1,238 tonnes, the strongest first quarter since 2016.

Technical analysis: The bullish outlook for the gold price is strong

The price of gold is higher during the day. Technically speaking, the yellow metal has formed an upward trend channel since May 2nd. diagram as XAU/USD is holding above the 100-period exponential moving averages (EMA). The Relative Strength Index (RSI) is in bullish territory around 72. The overbought condition of the RSI suggests that further consolidation cannot be ruled out before positioning for any short-term upside in XAU/USD.

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

On the other hand, a breach of the lower boundary of the uptrend channel at $2,345 paves the way to $2,334 (100-period EMA), followed by $2,300 (psychological mark).

The price of the US dollar this week

The table below shows the percentage change in the US dollar (USD) against the major listed currencies for the week. The US dollar was the weakest against the New Zealand dollar.

American dollar euros GBP CAD AUD JPY NZD CHF
American dollar -1.05% -1.30% -0.53% -1.26% -1.22% -1.73% -0.67%
euros 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 the percentage changes of major currencies against each other. The base currency is selected from the left column, while the quote currency is selected from the top row. For example, if you select the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change shown in the box will be EUR (base)/JPY (rate).

Inflation FAQ

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 due to geopolitical and seasonal factors. Core inflation is the figure that economists focus on, and it's the level that central banks, which are charged with keeping inflation at a manageable level, usually around 2%, aim for.

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 central banks focus on because it excludes volatile food and fuel inputs. When Core CPI rises above 2%, it usually leads to higher interest rates, and vice versa when it falls below 2%. Because higher interest rates are positive for a currency, higher inflation usually leads to a stronger currency. The opposite is true when inflation is falling.

Although it may seem counterintuitive, high inflation in a country pushes the value of its currency up and inflation down. That's because the central bank will typically raise interest rates to combat higher inflation, which attracts more global capital inflows from investors looking for a lucrative place to park their money.

Gold used to be an asset that investors turned to during times of high inflation because it retained its value, and while investors often still buy gold for its safe-haven properties during times of extreme market turbulence, this is usually not the case. . This is because when inflation is high, central banks will raise interest rates to combat it. Higher interest rates are negative for gold because they increase the opportunity cost of holding gold relative to an interest-bearing asset or putting money in a cash deposit account. On the other hand, lower inflation tends to be positive for gold as it lowers interest rates, making the light metal a more viable investment option.

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