Gold spikes after US inflation data increases Fed rate-cut bets

06/12/2024 14:17:38 GMT|ByJoaquin Monfort

Gold spikes higher after the release of US CPI data shows price rises slowing in May.
The data suggests the Fed may cut interest rates sooner than expected, lowering the opportunity cost of holding Gold.
The precious metal could experience more volatility after the Fed policy decision is announced on Wednesday.
XAU/USD continues to bump up against key resistance at $2,315.

Gold (XAU/USD) shoots higher after the release of US inflation data on Wednesday. Gold surged one percent to trade in the $2,330s after the release of lower-than-expected US inflation data raised bets the Fed will cut interest rates sooner than previously thought. Lower interest rates are positive for non-yielding Gold as they reduce the opportunity cost of holding the asset.

Gold could see further volatilty when the Federal Reserve’s (Fed) finishes its Open Market Committee Meeting (FOMC) at 18:00 GMT and announces its policy decision.

Gold strengthens after data shows inflation cooling in May

Gold surged on Wednesday after the release of US Consumer Price Index (CPI) data showed both headline and core inflation cooled in May. The data suggests the Fed could cut interest rates earlier than previously expected.

Headline inflation in the US flatlined on a month-over-month basis and rose 3.3% year-over-year. This was lower than the 0.1% and 3.4% rises predicted by economists and the 0.3% and 3.4% of the previous month, respectively.

Core CPI rose 0.2% MoM and 3.4% YoY which was also below estimates of 0.3% and 3.5%, and the previous month's 0.3% and 3.6% respectively, according to data from the US Bureau of Labor Statistics.

The data increases the chances the Federal Reserve (Fed) may move as soon as September to reduce interest rates. The probability of a rate cut by September rose to almost 70% after the release from 53% before, according to the CME FedWatch tool, which calculates odds based on the price of 30-day Interest Rate Futures.

The Fed meeting concludes at 18:00 GMT. Although the Fed is not expected to change interest rates yet, investors expect changes to the Summary of Economic Projections (SEP) or “dot-plot”, which provides a graphical view of how Fed members see interest rates evolving in the future.

Technical Analysis: Gold continues to retest key resistance

Gold continues to pull back and retest resistance from the bottom of its previous range at $2,315. That said, Gold is probably in a short-term downtrend, and given that “the trend is your friend,” the odds favor it continuing lower in the short-term.

The next downside target is at around $2,285, the 100% extrapolation of the down-move prior to the trendline break in May, or “a”.

XAU/USD 4-hour Chart

A stronger move down could see Gold meet support at $2,279 (late April-early May swing low).

On the other hand, a decisive break above the resistance level at $2,315 could suggest the short-term downtrend is losing momentum and more upside might be on the horizon.

Despite short-term weakness, the precious metal’s medium and long-term trends are still bullish, and the chances of a recovery remain high.

Economic Indicator

Consumer Price Index ex Food & Energy (YoY)

Inflationary or deflationary tendencies are measured by periodically summing the prices of a basket of representative goods and services and presenting the data as the Consumer Price Index (CPI). CPI data is compiled on a monthly basis and released by the US Department of Labor Statistics. The YoY reading compares the prices of goods in the reference month to the same month a year earlier. The CPI Ex Food & Energy excludes the so-called more volatile food and energy components to give a more accurate measurement of price pressures. Generally speaking, a high reading is bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

The US Federal Reserve has a dual mandate of maintaining price stability and maximum employment. According to such mandate, inflation should be at around 2% YoY and has become the weakest pillar of the central bank’s directive ever since the world suffered a pandemic, which extends to these days. Price pressures keep rising amid supply-chain issues and bottlenecks, with the Consumer Price Index (CPI) hanging at multi-decade highs. The Fed has already taken measures to tame inflation and is expected to maintain an aggressive stance in the foreseeable future.

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