Gold rebounds from fortnight low ahead of inflation reading

Gold price drops significantly as inflation turns cautious ahead of inflation data.
The appeal for the US Dollar improves as the US economy is handling the burden of higher interest rates comfortably.
A surprise upside in US inflation could spoil the market mood as discussions about one more interest rate hike would deepen.

Gold price (XAU/USD) remains under pressure as investors turn cautious ahead of the United States Consumer Price Index (CPI) data for August. The precious metal turns vulnerable as a strong recovery in gasoline prices indicates that headline inflation likely expanded at a higher pace in August, which could spoil the market mood and might improve the appeal for the US Dollar.

The US Dollar recovered swiftly on Tuesday as the American economy is absorbing the repercussions of higher interest rates by the Federal Reserve (Fed) efficiently, unlike other economies that are struggling to keep the labor market stable due to a restrictive monetary policy. August inflation data will be of utmost importance as it will be the latest one ahead of the September monetary policy.

Daily Digest Market Movers: Gold discovers intermediate support ahead of US CPI

Gold price corrects to near $1,910.00 as investors remain cautious about August inflation data, which will be released on Wednesday at 12:30 GMT.
As per the estimates, headline inflation expanded at a higher pace of 0.5%. Core CPI that excludes volatile oil and food prices grew at a steady pace of 0.2%. Annualized headline CPI is seen higher at 3.6% vs. the former reading of 3.2%. While Core inflation is seen softening to 4.3% from July’s reading of 4.7%.
Investors forecasted expansion in headline CPI at a higher pace, backed by a strong rebound in gasoline prices due to a significant rise in oil prices globally.
Market participants will keenly watch the inflation data for August as it is the last consumer prices reading before September’s interest rate policy.
A surprise rise in US inflation would elevate the gold price as it would boost hopes of one more interest rate increase by the Federal Reserve in the last quarter of 2023.
As per the CME Fedwatch Tool, traders see a 93% chance for interest rates to remain unchanged at 5.25%-5.50% in September. For the rest of the year, traders anticipate almost a 54% chance for the Fed to keep the monetary policy unchanged.
A hot inflation reading would also fade hopes that the Fed will push the economy on a "golden path", meaning a situation where inflation recedes without triggering a recession.
The US Dollar Index (DXY) rebounded quickly after discovering an intermediate support near 104.40 as fears of a global slowdown renewed. Market participants projected a slower growth rate in China due to a bleak demand outlook and slower job growth.
According to a Reuters poll, the Chinese economy is expected to grow 5.0% this year, lower than the forecast of 5.5% recorded in July's survey. For 2024 and 2025, growth is forecast at 4.5% and 4.3%, respectively.
The USD Index recovered to near 104.80, supported by US economic resilience due to stable labor growth, decent consumer spending, and an easing inflation outlook. Where European and Asian economies are struggling to perform well due to a restrictive monetary policy, the American economy is absorbing the burden of higher interest rates efficiently.
On the weekend, US Treasury Secretary Janet Yellen said she is confident that the central bank will contain inflation without damaging the job market. She doesn’t see China-led BRICS expansion as a major threat to the economy.
While the US economy is resilient despite higher interest rates, US equities could come under pressure due to rising mortgage costs. Bank of America (BofA) strategists expect that the expression of “higher for longer” interest rates by the Fed will trigger a sell-off in equities over the next two months.
The 10-year US Treasury yields recovered to near 4.28% amid caution over August inflation data.

Technical Analysis: Gold price attempts recovery from below $1,910

Gold price corrects to near the crucial support of $1,910.00. The precious metal remains sideways from the past week as investors remain uncertain about the interest rate outlook. The yellow metal is consistently facing selling pressure near the 20 and 50-day Exponential Moving Averages (EMAs), while the 200-EMA continues to provide a cushion. Momentum oscillators indicate a sideways price action, indicating that investors await a fresh economic trigger.

Inflation FAQs

What is inflation?

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%.

What is the Consumer Price Index (CPI)?

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.

What is the impact of inflation on foreign exchange?

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.

How does inflation influence the price of Gold?

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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